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Mortgages 101Jim and Jenny are buying their first home. They have enlisted the help of a terrific REALTOR®, they've made an offer on a lovely house in a growing neighborhood, and they are now sitting down with a mortgage lender to discuss some nuts and bolts. Let's listen in:
Mortgage Lender: "Well, congratulations Jim and Jenny! Based on your debt-to-income ratio, we should be able to approve you for a loan. I'd suggest that you amortize over 30 years, with 2 points and an escrow account for taxes and insurance. You'll need PMI, so you might want to go with an ARM. Or we could offer you a balloon reset mortgage. What do you think?"
Jim and Jenny: [blank stares]
Some mortgage terms you'll need to knowIn order to make the best choices for your next mortgage (and impress your friends and family), you need to understand some basic terms. If you still have questions, don't be afraid to ask questions. Your REALTOR® and your lender will be happy to provide more information.
- Amortization: This is a detailed breakdown of your payments over the life of the loan. An amortization table shows you how much of each payment goes to principal, and how much goes to interest.
- Adjustable Rate Mortgage (ARM): This means that your rate will vary from year to year. Adjustable rate mortgages generally start out with a lower rate than fixed-rate mortgages, so if you plan to stay in a home for just a few years, this might be the way to go.
- Escrow: These accounts are used to "hold" money. In the case of a homeowner, they're used for tax and insurance payments until the payment is due. Banks and mortgage companies like this arrangement, because they have control over these payments and can make sure they're made on time.
- Points: When you're shopping for a mortgage, you'll be quoted different rates depending on how many points you want to pay. One point equals one percent of your mortgage amount. So, if you were mortgaging $100,000, a point would be $1,000. When you pay points you are paying some of the interest on the loan ahead of time, so you'll get a lower interest rate.
- Private Mortgage Insurance (PMI): This will be added on to your mortgage payment if you're putting less than 20% down. In the old days, you'd be stuck paying this forever, but new regulations require lenders to cancel it when your mortgage balance drops to 78% of the original purchase price of your home.
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