Buying a home is one of the biggest financial investments most people make in their lifetimes. Though it’s an exciting adventure, it also comes with certain hurdles and uncertainties. Mortgage loans can be particularly complicated. On the surface, applying and qualifying for a home loan might seem like a simple process. Once you start researching loans, though, it often seems like the more you learn, the less you feel like you know.
Many of the terms used when you start looking into mortgages and help with home financing can be particularly confusing. Taking time to learn more about them before immersing yourself in loan applications can make things much simpler. This guide is designed to help you understand the language of mortgage lenders so you’ll be able to forge through the loan process with confidence.
Looking at the Basics of Mortgages
Overall, a mortgage is a loan that helps someone buy a home. Once you find a loan that meets your needs and qualify for it, it’ll cover most, or sometimes all, of the cost of the home your buying. From there, you’ll repay the lender who provided the loan in monthly installments over a prearranged number of years.
Delving Into Common Loan Terms
Now, let’s take a look at some of the terms you might hear when you’re talking to lenders. First, there are principal and interest. A portion of your monthly mortgage payments will be applied to the loan principal, which is the amount of money you borrowed. Another portion will be applied to the interest on it, which is basically an extra fee your lender charges for borrowing the money.
Fixed-Rate Versus Adjustable-Rate Mortgages
Interest rates on mortgage loans can vary based on several factors, including the market at the time you take out a loan, your lender, the type of loan you have, and your credit score to name some of the most significant variables. At the same time, there are fixed-rate and adjustable-rate mortgages, or ARMs. A fixed rate means that your interest rate remains the same throughout the life of the loan. An adjustable rate means the interest rate changes at times based on market conditions.
Term Length
Here’s where matters get a bit more confusing. We’re talking about different terms that may apply to loans, but there’s also the loan term itself. That’s the length of time you have to repay the loan. Most mortgage loans have 15 or 30-year terms, but there are other options as well. Having a shorter term generally means your monthly payments will be higher, but you’ll pay off the loan faster. Longer terms give you lower monthly payments, but you’ll be paying on your mortgage for longer, and you’re likely to pay more in interest overall.
Escrow
Escrow is another term you’re likely to hear. An escrow account is an account in which a portion of your monthly mortgage payments is deposited. Your lender will use that money to pay property taxes, homeowner’s insurance, and certain other expenses on your behalf.
Amortization
Amortization is the process of gradually paying down your loan balance. That happens naturally as you make your loan payments, but it’s a good term to know nonetheless. For the most part, the lion’s share of your monthly payments originally goes toward interest. Over time, the amount that goes toward the principal gradually increases.
Going Into the Homebuying Process Prepared
Those are some of the most common terms you’ll hear as you’re as you’re exploring loans and lenders. Understanding their meanings can help you feel more confident and better prepare you to choose the best loan for your situation. You’ll feel lest lost in industry jargon and more knowledgeable about what you’re getting into.
