The Lending Lexicon: Mortgage Terms to Know
Most prospective home buyers walk into the process knowing the basic terminology associated with mortgage loans, interest rates and closing costs. When it gets down to the nitty-gritty, however, many become lost in the jumble of letters, numbers and multisyllabic financial terms. Here are a few to know before you sit down with your mortgage lender.
1003 Form
This is the initial mortgage application form every buyer is required to fill out. Also known as the Uniform Residential Loan Application, it is the first step in getting approved to purchase a home.
Amortization
In layman’s terms, this means spreading out your payments over a series of years, typically 15 or 30. An amortization schedule is typically laid out at the start of the loan, and shows how a loan’s value will be measured over time.
Escrow Account
Many a buyer scratches their head at the thought of funds being held “in escrow” prior to closing, but the escrow account simply means a separate account held by the mortgage lender, out of which things like property tax and insurance are paid as the home transfers from seller to buyer.
PMI
This stands for Private Mortgage Insurance, and buyers are typically required to pay it monthly if they put less than 20 percent down on the home. It protects the lender in the event that the buyer defaults on the loan.
5/1 ARM
This is the most common type of Adjustable Rate Mortgage, and it means that the interest rate on the loan will remain fixed for the first five years, before becoming subject to market fluctuations at least once per year thereafter.
Although the home buying process can be fraught with confusion, especially for first-time buyers, most real estate professionals and mortgage lenders are more than willing to answer questions and explain confusing terminology. Don’t hesitate to ask – your financial future is at stake.
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