Hal Bundrick writes for NerdWallet.com, a consumer finance website that promotes financial literacy and looks for the best ways to save you money.
When you begin the process of buying a home, you'll be faced with a lot of jargon, a mountain of paperwork and eventually a bunch of those little yellow "Sign Here" stickers. Having a member-owned credit union on your side gives you the confidence that your loan is more than a lender-to-borrower deal — it is a member-to-member transaction. To get you on the inside track straight from the beginning, here are some of the mortgage terms you'll want to brush up on.
A computation of the number of years you will repay a loan, the interest rate and the resulting monthly payment. Each payment is allocated to the principal balance as well as interest.
Loans where the interest rate you pay can fluctuate are called adjustable-rate mortgages (ARMs). Fixed-rate mortgages (FRMs) have a set interest rate throughout the payoff period.
A balloon mortgage requires a final payment at the end of its term. For example, a 15-year mortgage may have a required payment each month comprising interest and principal for 179 months, with a larger-than-normal final payment of $10,000. Of course, that's just an example. The balloon payment can range anywhere from twice your normal payment to thousands of dollars.
The market value of your home minus what you owe. As you pay your mortgage, you are slowly gaining equity in your home. If property values rise, you gain additional equity. Home equity loans, lines of credit and reverse mortgages are lending products based on the equity you have in your home.
(Also called a Home Equity Conversion Mortgage, or HECM.)
This type of loan allows you to withdraw a portion of the equity in your home. To qualify, you must live in the home, be at least 62 years of age and either own your home outright or have a low mortgage balance.
You will continue to be responsible for utilities, taxes and insurance coverage, but rather than making payments on your mortgage, you can receive monthly payments — or even a one-time lump sum. It is simply a loan with no payments due. The money you receive, plus accrued interest, increases the amount you owe on your home and reduces your equity.
The Veterans Administration allows favorable mortgage rates and terms to military servicemembers, veterans and eligible surviving spouses.
As opposed to the annual percentage rate (APR), which is a standard and legally defined calculation used by lenders, an effective interest rate is an estimate of the actual annual cost of credit to the borrower after points (see Mortgage Points below) and fees are factored into the compounded interest rate. An effective interest rate can also be defined as your annual percentage rate less the tax-deductible interest paid — and then reduced from taxable income as an itemized deduction on your tax return.
Mortgage points, or discount points, are a reduction in principle in one percent increments. Each point equals one percent. Paying points often helps you reduce the interest rate of your mortgage.
A mortgage payment can include a portion of the total that is held in an escrow account — effectively a third-party holding account — used to pay property taxes, insurance and other stipulated expenses. An escrow account can also be employed to hold "good-faith" money as a deposit toward the down payment on a pending purchase.
Private mortgage insurance (PMI) is a lender-protection policy for real estate transactions that include lower down payments. In order to minimize the risk, the lender takes in less up-front money (often by accepting down payments as low as 3 percent, rather than the customary 20 percent). PMI is purchased by the borrower; it will pay a mortgage balance in full in the case of a default.
When you cease making timely payments on your mortgage, it can enter into default, meaning the lender can begin foreclosure proceedings to repossess your home.
If a borrower becomes late in making mortgage payments and faces the possibility of foreclosure, the lender and borrower may come to terms with a forbearance agreement. It is a "grace period" that enables the borrower to get caught up on mortgage payments while the foreclosure process is delayed.
The Real Estate Settlement Procedures Act (RESPA) is a set of consumer-protection rules requiring lenders and mortgage servicers to provide complete, accurate and prompt information regarding home loans. It also forbids kickbacks and referral fees between lenders and related parties - as well as sets restrictions on escrow accounts. RESPA regulations are enforced by the Consumer Financial Protection Bureau (CFPB), established by Congress to enforce federal consumer financial laws.
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