If you're new to buying a home and don't have the time to read an encyclopedia on mortgages, this is the article for you. We'll go over some basic mortgage terms and concepts to get you started in your journey.
Choosing to obtain a mortgage is an important and significant decision. It costs money both when the mortgage is obtained, and throughout the life of the loan in the form of interest. It also results in a large monthly expense. Therefore, the borrower should carefully choose where to purchase a loan as well as what type of loan program to choose.
As you compare mortgages, you’ll want to understand some basic terms:
Mortgage, rate, monthly payment, closing costs, APR, ARM, and fixed.
First, what is a mortgage? A mortgage is a loan used to either purchase a property or to pay off an existing mortgage loan. The property itself becomes the collateral. In other words, if the borrower defaults on the mortgage, then the mortgage owner has legal claim to the house and can take possession of it.
The mortgage rate is the percentage that is used to determine the amount of interest you’ll pay over the life of the loan. Interest is basically your cost for borrowing money. The interest rate can remain constant throughout the loan term. In this case, the loan is considered “fixed rate”. If the rate can change after a specified period (such as after one year or after five years), then the loan is considered an adjustable rate mortgage or ARM.
In addition to interest, there are additional costs to borrowing money for a home. These fees might include paying for the loan application, checking your credit history and scores, underwriting (seeing if you qualify for a specific loan program), title search and insurance, having the property's value appraised, loan origination, etc. All together these fees are called "closing costs".
While the interest rate is an important number, by itself it is insufficient for comparing lenders. This is because lenders and brokers can charge different fees, making a loan from Lender A actually less expensive than from Lender B, even though it has a higher interest rate. In order to help provide a number that can be compared across lenders, the government has regulated that closing costs be added to the loan amount to determine what is known as the Annual Percentage Rate or APR.
Besides looking at the APR, you'll want to compare the total monthly payment that you will owe. Also known as PITI, this amount includes principal (P), interest (I), property taxes (T), hazard or homeowner's insurance and mortgage insurance (the second "I"), and HOA dues. When mortgage insurance is taken into account, loans with a higher interest rate might actually have a lower monthly payment than loans with lower interest rates.
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