A Glossary For First-Time Home Buyers
As a first-time home buyer, do you need help understanding all the complex terms involved in the process? We’ve got you covered. Here are some basic mortgage terms to help you get started.
Adjustable-Rate Mortgage (ARm):
An ARM is 5/1, the 5 is the number of years the loan is at a fixed rate, and the 1 is how much the interest rate can increase after the 5th year is over. The most common options for these are 5/1, 7/1, and 10/1.
Appraisal:
The value of your house compared to other similar houses in the surrounding area.
Bi-Weekly Mortgage:
A Bi-Weekly Mortgage is a mortgage payment split into two parts, one on the 1st and one on the 15th. This saves three years off a thirty-year loan. You are paying off the principal loan amount, saving interest, and paying the principal down faster with compound interest.
Debt to Income Ratio:
A debt-to-income ratio measures how much your monthly income goes to repaying debts/ mortgages. To calculate, divide your monthly debt payments by your total monthly income.
Equity:
Every year, your house gains or decreases in value. The difference between what you owe and what the house is worth is called equity. DFW average is a 12% gain over the last few years and more in some areas. You can use the natural equity gain in your home to eliminate mortgage insurance and you can cash out the equity up to 80% loan to value.
Escrow:
When you put an offer on a home, you go into escrow. This means you give the seller an agreed-upon amount in good faith that you will proceed with the purchase.
Fixed-Rate Mortgage:
A fixed-rate mortgage means that you will pay the same principal and interest amount for the term of the loan. The most common fixed-rate mortgage terms are 30 years, 15 years, 10 years, and 5 years.
Good Faith Estimate:
A good faith estimate, also known as a loan estimate, breaks down all the loan fees and your loan payment.
Home Owners Association (H.O.A.):
An HOA is a Home Owners Association, they are intended to maintain constancy throughout the neighborhood and keep home values up.
Inspection:
An inspection is where an inspector will come in and check to make sure that all the appliances, water, electric, A/C and heating, etc. are all in working order. It’s always a good idea to make sure things are in working order before going through with the purchase.
A Lean:
A lean is a legal document filed when purchasing the home with the mortgage to protect the bank’s assets until you have paid off your mortgage. At that time, the bank will release the lean, and you will have a clear Deed.
Mortgage Broker:
A Mortgage Broker will shop through multiple wholesalers to see what products and rates best fit your needs.
Mortgage Lender:
A Mortgage Lender is lending their own money, and most of the loans with them are going to be conforming (Fannie or Freddie, FHA, VA, Conventional, USDA)
Private Mortgage Insurance (PMI):
PMI is an institution's way of protecting its investment in case there is a default on a loan. The institutions or government will require you to have mortgage insurance (MI) until you have reached 20% equity in your home. The cost is driven by two factors, credit score and loan to value. The lower the credit score, the higher the mortgage insurance. The less money down, the higher the mortgage insurance.
Property Improvement District (P.I.D.):
A PID is a Property Improvement District. If you are in one, you will be billed for it on your taxes. These taxes help cover the costs of improvements to streets, lights, and continued developments.
Pre-Paid Property Taxes:
You pay your property taxes 3 months ahead at the time of closing, so you have a cushion in your escrow account. This is beneficial because it keeps your escrow account from being short on funds as property taxes increase.
Second Mortgage:
Often used as a way to make improvements to their residents, they would be a second lean holder. Some people also use a second mortgage to cover their down payment if they are short on funds for the first mortgage. Interest rates are typically higher on the second mortgage.