Home Buying and Mortgage Terms
When looking for a new home, you may have heard a lot of technical terms that would have caused you to scratch your head wondering what they even mean! If this is what’s bothering you, you’ve come to the right place! The following home buying tips will help you dispel the confusion.
Interest Rates — When you shop around for interest rates, you are not likely to experience a lot of variation between lenders, especially banks. Someone may offer you low interest rates, but you need to be careful here. This is because low rates often coincide with added fees and loan origination charges.
Closing Costs - Closing costs are paid at closing to cover the transfer of ownership. This is in addition to the down payment. The down payment varies, but generally speaking, the higher the down payment the less to be financed.
Rate Lock — If you find an attractive interest rate, you can “lock” for a specified time (usually between 30 and 60 days). This is the guaranteed time in which the lender will not change his quote.
Points - Points are the additional fees charged by the lender when he offers a mortgage at an interest rate based on your credit rating. The borrower has the option of paying these “points” over the full term of the loan or at the time of closing. Rule of thumb says that homebuyers may opt for fewer points if they don’t plan to stay in the home for several years. In this case, interest rates would be higher while points will be lower, and vice versa.
Debt-to-Income Limits - One of the best home mortgage tips is to calculate your debt-to-income ratio before applying for a loan. Ask the lender if they can accept the ratio. This can help you get the loan without higher or additional fees.
Turn Time - This is the time the whole process takes, from the time you apply for the loan until the closing. When shopping around for mortgages, it is good to know what each lender’s average turn time is.
Adjustable Rate Mortgage (ARM) — As the name implies, this is a loan where monthly payments are not fixed. They vary with changes in interest rates – typically at pre-defined intervals.
Balloon Mortgage - This is where you take a loan at a low interest rate, but after an initial fixed time period, the balance is due or is refinanced (i.e. a balloon effect).
Fixed Rate Mortgage - This is the opposite of the ARM, i.e. a mortgage where the monthly payments and interest rate remain fixed.
Annual Percentage Rate (APR) - As the name implies, this is where the mortgage cost is calculated by its annual interest rate, including:
- Mortgage insurance
Any other fees related to the mortgage will also be used to calculate the APR.
Bridge Loan - A bridge loan is a short-term loan that you secure with a sale of the house. The funds are used either for the construction of the new house or to pay closing costs.
Escrow - When you obtain a loan, you come across something known as an escrow. This is a special account where the lender sets aside some money from the monthly mortgage payments. This money is used to cover homeowner’s insurance, property taxes, and other related expenses.
Mortgage Insurance - Mortgage insurance is there to protect the lender against loss if the borrower does not or cannot pay.
Miscellaneous Fees - When sifting through home buying terms, you should look for additional charges apart from the loan repayment and the interest. These can include:
- Charges for origination
- Document preparation
- Courier and application fees
Obtain a pre-approval letter
A pre-approval letter serves 2 purposes. It tells the builder that you are qualified, and also helps you get an estimate of the maximum loan amount that you can hope to receive.
Review the Truth in Lending and Good Faith Estimate
Review the quotes provided by the lender. It is always advisable to have any queries addressed before you proceed.
Factor in Delays
There are various factors that can needlessly delay the loan process. For instance, underwriters may require additional documentation.
Obtain a copy of the settlement sheet
Ask for the (HUD-1) three days before the scheduled closing. Make sure there are no discrepancies between the settlement sheet and the quotes that you initially received. If there are any discrepancies, get them fixed there and then.