Basic Home Loan Terms Explained
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Basic Home Loan Terms Explained
Navigating Home Loan Terminology
Embarking on the journey of home buying can be daunting, particularly for first-time buyers who encounter a flurry of unfamiliar terms. Don’t worry?"concepts like ARMs, points, interest rates, good faith estimates, and lock-in dates may seem complex, but they all have straightforward explanations.
Types of Home Loans
Home loans generally fall into two categories: mortgages and home equity loans.
- Mortgages: A mortgage is a loan secured against your property. Essentially, it's a lien, which means the lender has a legal claim on your home until the loan is fully paid off.
- Home Equity Loans: This type of loan is also secured by your property, but it sits secondary to your first mortgage. It’s based on the equity you have in your home?"the difference between your property’s market value and the amount you owe. A positive equity means your home’s value exceeds the amount owed, while negative equity indicates the reverse.
Understanding Liens
A lien is a legal claim or right against a property, signifying an obligation. When you sell the property, all liens must be settled to transfer clear ownership to the new buyer. This process involves a title search to uncover any legal interests or claims tied to the property.
Mortgage Types: Fixed-Rate vs. Adjustable-Rate
When choosing a mortgage, you’ll come across fixed-rate and adjustable-rate options:
- Fixed-Rate Mortgage: The interest rate remains constant throughout the loan term.
- Adjustable-Rate Mortgage (ARM): Initially, the interest rate is lower for a set period (typically 3 or 5 years), then adjusts based on specific conditions, often linked to federal rate changes.
Points and Pay-Downs
“Points” refer to pre-paid interest to lower your interest rate. One point equates to 1% of your loan amount, so for a $100,000 mortgage, a point costs $1,000. Paying points can reduce your long-term interest costs.
Private Mortgage Insurance (PMI)
If your loan exceeds 80% of your property's value, lenders typically require PMI. This insurance protects the lender, not the borrower. PMI is approximately 0.5% of your loan amount annually, divided into monthly payments.
The Role of Appraisals
An appraisal assesses your property's market value, conducted by a professional. It influences PMI requirements and overall loan conditions by comparing similar property sales and market trends.
Escrow Accounts
Escrow involves monthly payments collected by your lender for property tax bills, generally covering 1/12 of your yearly taxes. This ensures taxes are paid on time, often with a small cushion included to prevent shortfalls.
Conclusion
While these terms are commonly encountered, don't hesitate to seek clarification during the home loan process. The more you understand, the more empowered you'll be in making informed decisions.
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