Terms to Know When Applying for a Mortgage
Buying a house may seem easy, but it's not. It's a long, daunting process. From house-hunting to applying for a mortgage, from calculating your estimated payment with a house payment calculator to closing, it all takes time!
When buying a house, there are many phrases that come up. These are some of the most-used phrases that you may hear when you are searching for a property.
Here is an overview of some of the most commonly used terms in this scenario.
Adjustable-Rate Mortgage
An adjustable-rate mortgage is a type of mortgage that has a fluctuating interest rate, based on a future benchmark. The interest rates can either go up or down, depending on the predetermined benchmark.
The adjustment periods may be monthly, quarterly, semiannually or annually. The initial interest rate is locked in for a specific period of time and the periodic adjustments will happen after that locked-in period expires.
During these adjustments, the loan holder will have to pay more if rates go up and less if rates go down.
Fixed-Rate Mortgage
A fixed-rate mortgage is a type of mortgage that offers the borrower the same interest rate for the entire term of the loan.
Unlike adjustable-rate mortgages, where the borrower pays a lower initial interest rate, but which increases periodically over time, with a fixed-rate mortgage you know exactly what your monthly payments will be.
Principal
When someone takes out a mortgage, the money they borrow is called the principal. The individual who takes out the mortgage is not lending money to the bank. Rather, they are borrowing it and paying back with interest over time.
The amount of equity they have in their home is called the principal balance, and it includes both what they owe on their mortgage and what's owed on any other loans against that property.
For example, if an individual has a $150,000 mortgage with $40,000 owed on another loan for $190,000 total owed against their home - then their principal balance would be $190,000.
Title
When a borrower pays off a loan, the new owner of the property who is taking over the mortgage becomes the title owner.
Title in mortgages refers to a legal document that transfers ownership of a property to a person buying a home from another person or entity. When borrower pays off his or her mortgage, they have completed their ownership contract and have transferred the title to their lender's satisfaction.
Appraisal
An appraisal is an estimation of the value, fair market value, or cost of a property.
An appraisal is one way that lenders can be sure that they are giving out loans for an appropriate amount. It produces an unbiased evaluation of the worth of the property.
Appraisers need to be professionals who are certified by their local government and made to follow specific guidelines to ensure accuracy. Appraisals use different methods depending on the type of property being appraised.