Key Terms to Know for Mortgages and Loans
Whether you're a first-time homebuyer or an experienced player in the real estate market, understanding the landscape of home loans requires familiarity with several key factors. These include current interest rates, loan agreement details, and available loan options to suit your needs. In this blog post, we have put together a glossary of loan and lending terms to provide you with the foundational knowledge necessary for a smoother home-buying experience.
Home Loan & Lending Terms to Know
Principal is the original loan amount you borrow from a lender. For example, if you take out a $200,000 mortgage, $200,000 is your principal. As you make payments, a portion goes toward reducing the principal balance.
Interest is the cost of borrowing money, expressed as a percentage of the loan. Lenders charge interest as compensation for the risk they take by lending you funds. For example, a 5% interest rate on a $200,000 loan means you’ll pay $10,000 annually in interest.
Annual Percentage Rate (APR) includes both the interest rate and additional fees (like origination fees or closing costs). It provides a more accurate reflection of the total cost of borrowing. Comparing APRs is crucial when shopping for loans.
Fixed-Rate Mortgage has an interest rate that stays the same for the entire loan term, providing predictable monthly payments. Common terms include 15, 20, or 30 years.
Adjustable-Rate Mortgage (ARM) has an interest rate that fluctuates after an initial fixed period (e.g., 5, 7, or 10 years). The rate adjusts based on a market index, which can lead to lower payments initially but variable costs later.
Loan-to-Value Ratio (LTV) measures the loan amount compared to the home’s value, expressed as a percentage. For example, if you borrow $180,000 to buy a $200,000 home, your LTV is 90%. A lower LTV often qualifies for better interest rates.
Private Mortgage Insurance (PMI) is required if your down payment is less than 20% of the home’s value. It protects the lender if you default on the loan. PMI adds to your monthly costs but can often be removed once you reach 20% equity in your home.
Amortization refers to the gradual repayment of your loan through scheduled payments. Each payment includes a portion for interest and principal, with more going toward the principal over time.
Closing Costs are fees paid at the end of the home-buying process, including lender fees, title insurance, appraisal fees, and more. Closing costs typically range from 2% to 5% of the loan amount.
Prepayment Penalty is a fee for paying off the loan early. This penalty compensates lenders for the interest they lose when you pay off the balance ahead of schedule.
Debt-to-Income Ratio (DTI) compares your total monthly debt payments to your monthly income. Lenders use this ratio to determine your ability to repay a loan. A lower DTI often improves your chances of approval.
Equity is the difference between your home’s market value and the outstanding mortgage balance. Building equity over time allows you to borrow against it for renovations or other needs.
Escrow Account holds funds for property taxes and homeowners insurance, included in your monthly mortgage payment. Your lender manages these payments on your behalf.
Foreclosure occurs when a borrower fails to make loan payments, and the lender seizes the property to recover the owed amount. Avoiding foreclosure involves understanding your loan terms and seeking help early if financial trouble arises.
Refinance involves replacing your current loan with a new one, often to lower your interest rate, reduce monthly payments, or change the loan term.
Understanding these terms can make your mortgage or loan process smoother and more manageable. Always ask questions and consult a trusted advisor if something isn’t clear. With the right knowledge, you’ll be better equipped to make sound financial decisions.
Be Sure to Do Your Homework
As the housing market shifts, so do lending practices. A mortgage broker—an independent professional who acts as an intermediary between you and lending institutions—may be able to help you find a better rate than you can on your own. Also, be sure to shop around; slight variations in interest rates, loan amounts, and terms can significantly affect your monthly payment.
It is important to do your research and understand what options are available for you. Many home buyers do not take the time to get prequalified for a new home loan. Many people often do not take the time to shop around to find the best mortgage for their particular situation. It’s important to ask plenty of questions and make sure that you understand the home loan process completely. You can learn more about the pre-approval process and what to expect on our website.
More Helpful Resources
If you would like to learn even more about lending and home loans, our local market, and the entire real estate process, we have many videos with local experts available. Just visit our YouTube Channel and be sure to subscribe to our channel for the latest real estate videos. If you have any questions or want to get started with the pre-approval process for a home loan please do not hesitate to contact me. We have a list of preferred, local lenders that we are happy to help connect you with to get you started. We also have a helpful page on our website where you can learn about the home loan pre-approval process and the requirements.
The Angst Real Estate Team
Looking for an experienced Real Estate Team in Reno/Sparks and Northern Nevada? Look no further than Ken Angst and his team! With a demonstrated history of success working with buyers, sellers, and investors, we are the top authority in the area. Stay up-to-date on the latest trends and topics in the Reno/Sparks real estate market with our weekly podcast, designed to provide you with the information you need to make informed decisions. Whether you're looking to buy, sell, or invest in property, we have the expertise you need to achieve your goals. Contact us today to learn more! 775-525-0309
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