Hopefully you have improved your financial standing after reading my Financial Terms blog. After a few adjustments suggested therein, you may be ready for the big prize: home ownership in the Harrisburg area. But just like there are terms that you need to understand to achieve financial health, there are plenty of other terms that you need to understand in seeking home ownership relating to mortgages. Here is some guidance in navigating mortgage applications.
Common types of mortgages
- Adjustable Rate Mortgage
- A home loan in which the interest rate on the outstanding principal is a certain margin above an index (one beyond the control of the lender) which is adjusted periodically according to the index. For instance, if your interest rate has a margin of 2% over the ABC index, and the ABC index at the time of your loan is 5%, your interest rate would be 7% of the unpaid principal until the next scheduled adjustment. The maximum and minimum interest rates are often capped. These mortgages generally start out with an interest rate lower than a conventional fixed rate loan but, if the index increases, the adjustable rate could exceed the fixed rate amount.
- Fixed Rate Mortgage
- A home loan in which the interest rate is determined at the beginning of the loan and does not fluctuate. Several factors affect this rate such as your credit score, points paid (see below) and down payment. This type of mortgage provides predictable payments with possibly a fluctuation in escrow payments (see below).
- Reverse Mortgage
- A home loan for borrowers 62 or older. The borrower uses the equity in their home to pay existing mortgage(s) and other liens. The lender is paid, with interest, when the borrower leaves the home. The borrower can, but is not obligated to, make payments to pay down the principal borrowed. The borrower is usually still responsible for future taxes, insurance and utilities.
Mortgage terms
- Amortization
- The process whereby a mortgage loan is paid based upon payments consisting of principal and interest. The crediting of principal to the loan reduces the interest due and pays down the loan quicker. Mortgage loans often pay mostly interest at the beginning and mostly principal at the end of the loan term.
- Annual Percentage Rate
- The interest rate charged by a lender over a 12 month period. In mortgage terms, the rate includes certain fees associated with the loan. This rate is used to compare different loans using the same defined standards for each loan.
- Debt-To-Income Ratio
- The amount of debt to be borrowed compared to the borrower’s pre-tax income. Like credit scores, different debt-to-income ratios are acceptable for different types of loans such as houses. cars and other purchases. The lower this ratio is, the better for the borrower.
- Escrow
- An account created by your lender to reserve funds for the payment of real estate taxes and insurance (and sometimes other expenses). Each month, you will pay approximately 1/12 of each expense into the escrow account so the lender can pay the charge when it comes due. At the beginning of the loan, the lender will figure how many months it is until a particular payment will come due and will collect the required amount to have sufficient funds at the proper time. For instance, if your first mortgage payment is in April and your school taxes are due in August, you would have made 5 payments into escrow when the tax needs to be paid so at closing your lender will collect 7 months of school taxes to have enough in the account when August rolls around. You generally do not earn interest on this account but there are no fees either.
- Points
- In mortgage terms, a point is 1% of the mortgage loan amount. “Origination points” cover the cost of making the loan. “Discount points” reduce the interest rate of the loan in exchange for interest paid up front.
Hopefully this limited tutorial on mortgage terms you should know in Harrisburg helps you to understand which type of mortgage and under what terms is most advantageous to you. Such an investment is certainly worth preserving. If someone you know or you are having problems keeping up with your mortgage payments, contact us. We give second chances on Second Street.