Several terms are used frequently when applying for a mortgage. Use this quick reference guide to understand the terms that you will see and hear during this process.
Types of Mortgage Loans
Depending on your financial situation, you may have the option of choosing from different types of loans, including:
– Fixed-rate mortgages keep the interest rate and monthly mortgage payments the same over the life of the loan. The most common mortgages are available for terms of 10, 15, 20 or 30 years.
Adjustable-Rate Mortgage (ARM)
– Unlike a fixed-rate mortgage, adjustable-rate mortgages have fluctuating interest rates that increase or decrease depending on market conditions.
Combo Mortgage + Home Equity Loan
– Some financial institutions, like The Summit Federal Credit Union, offer a combination of a mortgage and home equity loan that comes with special perks like better rates and deals on closing costs. This can help you hit the ground running with repairs or renovations to make the new-to-you house your home.
– After you close on your house (i.e. sign the mortgage paperwork, get the keys and can move in), your mortgage moves to what’s referred to as “servicing.” The mortgage servicer is the institution that handles the day-to-day administration of the loan, including things like sending statements, receiving payments and managing escrow accounts. Some institutions outsource this duty once the mortgage is secured. Ask your lender where your mortgage will be serviced; a mortgage serviced locally means you’ll have direct access to a local team of experts who you can trust and feel secure about, knowing they are working on behalf of your best interests as the homeowner.
Pre-Qualification vs. Pre-Approval Mortgages
Pre-qualification is an early stage of the homebuying process where you get an estimate of what you might be able to borrow based on a credit check and information you provide about your finances.
Pre-approval happens after you complete a mortgage application. The lender will perform a credit check and verify your financial information. If you’re pre-approved, you will get a preapproval letter good for a set number of days that offers (but does not commit to) a loan for a specific amount.
Title is proof that you own your home. It includes a physical description of your property, the names of you and anyone else who owns the property, and any liens on the home.
Deed is the actual document that proves ownership. This is sent to you after you have paid off the loan.
Down Payment is the payment made to secure your loan. You may see it written as a percentage of the loan. You will bring your down payment to the closing.
Escrow is an optional account where your lender holds money for property taxes and/or homeowners’ insurance. This option allows you to split up taxes and insurance payments over a 12-month period rather than paying a large sum at one time.
Appraisal is an unbiased estimate of the fair market value of what a house is worth. Appraisals give the lender an objective way to assess the market value of the home and ensure that the amount of money requested by the borrower is appropriate.
Closing Costs are the costs associated with finalizing a mortgage and are typically between 3-6% of the value of your loan. These may include appraisal and/or loan origination fees. Some financial institutions offer no closing costs mortgage options, where for a slight difference in the mortgage interest rate, the lender will pay closing costs including things like the appraisal, title insurance, mortgage tax and other fees. This means you won’t need to pay most of the closing costs–typically a few thousand dollars or more–at your closing. This is helpful if you don’t have enough funds for the down payment and closing costs or if you want to use the funds for needed fixes on the home. Talk to a member of The Summit Federal Credit Union Mortgage Team to explore this option.
Homeowners’ Insurance protects you from damages like fires, burglaries and storms. Coverage comes with a monthly premium payment. Some mortgage lenders may require you to maintain at least a certain level of coverage for the life of your loan.
Private Mortgage Insurance (PMI) is a type of insurance that protects the lender if you default on your loan. Lenders usually require PMI if you have less than a 20% down payment. You can often remove PMI from your loan when you reach 20% equity of the original value of your property.
Title Insurance is a single payment to protect yourself against outside claims to your property.
We Are Ready to Help
You don’t have to memorize what each term means or how they all fit together to finalize a mortgage for your first home. The local Summit Federal Credit Union Mortgage Team can help make this process efficient and easy to understand. Contact us today.