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Buying a house? Here's a guide to all the jargon you need to know

June 04, 2018 - 1:15 pm

While military families seem to speak a language of their own, home buying jargon is another animal. To start you off with confidence, we have compiled a field manual of common terms used when buying a home.

Adjustable rate mortgage (ARM): A mortgage loan with an interest rate that fluctuates. With an adjustable rate mortgage, you get a lower interest rate for an initial time period (usually the first 1, 3, 5 or 7 years). After that, your interest rate will reset at the market rate. Most ARMs have caps that limit how high the interest rate can go. Make sure you will be able to afford your payment if your interest rate reaches that cap.

Amortization: This is when you gradually pay off your mortgage over the years by making regular payments. An Amortization Schedule of your loan shows you how much principal and interest you are paying each month on your loan.

Annual percentage rate (APR): This rate tells you the full cost of borrowing money. It includes the simple interest rate of the loan, points, and add-on fees (such as closing costs). Because it includes fees and points, the APR is typically higher than the simple interest rate quoted on a loan.

Conventional mortgage: A conventional loan is not guaranteed by the US government as are FHA, VA and USDA loans. Conventional loans usually have lower interest rates than government-backed loans and typically require higher down payments, but they may also be processed faster because there is usually less paperwork than government-backed loans.

Debt-to-income (DTI): Your debt-to-income ratio is used to calculate how much mortgage you can afford. In general, lower your DTI, the easier it will be for you to pay your mortgage. Add up all of your monthly debt payments, including rent or mortgage, credit cards, car loans, student loans, etc and divide that number by your gross monthly income (earnings before taxes).

FHA loan: An FHA loan is insured by the US Federal Housing Administration (FHA) and typically offers a smaller down payment (as low as 3.5%). Other benefits include lower closing costs, easier credit qualifying, and the option to use money received as a gift toward your down payment,

Fixed rate mortgage: A fixed rate mortgage locks in your interest rate for the life of your loan. Your base monthly mortgage payment (principal and interest) will always stay the same (although your taxes and insurance may change). If you stay in your home for a long time, a fixed rate mortgage may be more affordable than an adjustable rate mortgage.

Escrow: The holding of funds or documents by a neutral third party prior to closing on your home sale.

Escrow account: Your mortgage company will offer an escrow account which is established and managed by them to pay your real estate taxes, hazard insurance, and mortgage insurance, if required. Part of your total monthly mortgage payment will be used to fund the escrow account.

Grantee: The buyer of a deed (That's you!).

Grantor: The seller of a deed (That's your mortgage company).

Interest rate: Your mortgage interest rate is how much you pay each year to borrow money from your lender. It is a percentage of your loan amount. Your mortgage rate is also referred to as the simple interest rate which is different than the Annual Percentage Rate (APR), which includes points, lender fees and other charges that are part of the cost of your loan, as well as the simple interest rate.

Jumbo loan: A jumbo loan is a mortgage that is larger than the conforming loan limits published by the Federal Housing Finance Authority (FHFA). You will probably pay a higher interest rate on a jumbo loan. Also, jumbo loans typically require more than 20% down payment.

Points: Points are interest charges that you pay up front when you get a mortgage. One point is equal to 1.00% of the total loan amount. Points are also called discount points or loan origination fees. You can pay points to get a lower interest rate or to lower your monthly mortgage payment. Also, there may be a tax benefit from buying points. Consult a tax professional and/or financial advisor to calculate the benefit that you would obtain from paying points.

Rate lock: A rate lock happens when a lender guarantees, in writing, to give you a specific interest rate as long as your loan closes in a certain time period (usually 30 or 60 days) and there are no major changes in your loan application. Rate lock agreements usually spell out, interest rate, points to be paid (if any) and rate lock period. A rate lock gives you peace of mind, especially when interest rates may be going up.

Underwriting: The practice of a lender reviewing the application, documentation, and property prior to processing a loan decision.

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