There are times when I am talking with homebuyers and I realize they don't understand the "language" I am using! Sometimes it doesn't matter whether you are a first time homebuyer or have bought multiple homes, there are words we use that you may not understand. When I meet with a first time homebuyer, I want to make sure they understand the process and there are times you can see the "glazed over" look. So here are a few terms that you should understand if you are buying or selling a home.
-Adjustable Rate Mortgage (ARM) – an adjustable rate mortgage means that your interest rate will vary based on the terms of the loan. Frequently it is fixed for a short time (maybe 3 or 5 years) and then will adjust. ARM's usually have a cap on the interest rate. These days most mortgages are fixed rate loans.
-Amortization schedule - this is a breakdown of the loan and shows how much principal and interest are paid, either on a monthly or yearly basis.
-Closing – This is the final step when you are buying a home, this is when the title transfers to you.
-Down Payment – This is the amount of money you need for the down payment on your mortgage. It may be 3.5% for FHA or 5% or more for conventional loans.
-Escrow – If there are repairs, the title company may hold money in an account until all the conditions (or repairs) have been satisfied. Usually an appraiser has to make a final inspection so the lender and title company know that the repairs have been made. Then the money is released from the escrow account.
-Fannie Mae/Freddie Mac - These are two government sponsored entities that purchase mortgages from lenders. The purpose is the promote stability and affordability in the housing market.
-Flipping – Investors will purchase a home with the intent of making repairs to it or updating it to re-sell.
-Good Faith Estimate – This is a federally regulated document that shows your closing costs. It is provided to you so you can compare costs with other institutions.
-Lien – A lien occurs when you have a legal claim to the property. There may have been work done to a property that was never paid for so they put a lien on the property so they can get paid if it's sold.
-Points – Points are an upfront fee that is added to your closing costs, usually they are paid to lower your interest rate. One point is equal to 1% of your mortgage amount.
-Preapproval/Prequalification – There is a difference between the two terms. A prequalification means that a lender has talked to you, maybe pulled a credit report and determined that you should be able to be approved for a specific loan amount. A preapproval means that you have had a credit report pulled, your income and assets have been documented and your loan has been through underwriting. A preapproval is much more detailed then a prequalification.
-Underwater – This means that you owe more on the home than the property could sell for.
-Underwriting – This is the process a lender goes through to determine if they should extend credit to you. The underwriting piece has become a little more extensive with some of the mortgage changes in the last month and they are now documenting the ability to repay the loan more than they used to.
If you are meeting with a loan officer (or even a realtor) and you aren't sure about something, make sure you ask to have it explained. A home purchase is one of the largest transactions you can make and you want to make sure you understand the process. There have been a lot of people that just accepted what they were told and never understood their loan terms and later realized they couldn't afford the loan they were given. Please ask questions and make sure you understand the process. If you aren't getting your questions answered, you may want to talk to another realtor or loan officer. Most realtors and loan officers I know are more than willing to make sure you understand the entire process.