Finance
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Whether you are buying a home for the first time or the tenth time, a few definitions may be helpful as you begin to talk with lenders and REALTORS. Here are a few of the most common types of mortgages and loan programs. This is not an all inclusive list.
Prequalification
Based on information about income, assets and debt you
give a lender verbally, the lender determines whether or not you are likely
to be approved for a mortgage and the maximum mortgage you will qualify for.
Approval of a mortgage will be dependent on written verification of this
information and an appraisal of the home you wish to purchase.
Preapproval
You have provided the lender with written verification of
income, assets and debt and have been approved for a mortgage contingent on
choosing a home (contracting to purchase a specific home for a specific
price) and an appraisal of that home.
Loan Committment
You have been approved for a mortgage for a specific home
for which you have contracted to purchase for a specific price.
Lock-in
Agreement with your lender to pay a specific interest rate on your
mortgage. Interest varies day to day. Generally, you must be within 60 days
of your scheduled closing date in order to lock-in your interest rate.
Fixed Rate Mortgage
This is the most common type of mortgage where your monthly payments for interest and principal (mortgage balance) stay the same for the life of the loan, usually 15 or 30 years. Property taxes and homeowners insurance may increase, but this will have minimal impact on your monthly payments.
Adjustable Rate Mortgage (ARM)
Adjustable rate mortgages usually offer an interest rate that is 2-3 percent below a comparable fixed rate mortgage. However, the interest rate changes at specified intervals (for example, every year) as interest rates fluctuate. With an ARM, your monthly payments can increase or decrease at each set interval. There are many types of adjustable rate mortgages. Your lender can help you decide if one is right for you.
Balloon Mortgage
Balloon loans are short term mortgages that provide a level (fixed) payment during the term of the loan but do not fully amortize over this period. At the end of the loan term, often 5 or 7 years, there is still a remaining loan balance, to be paid in full. This is accomplished either by refinancing or selling your home and buying your next home.
Escrow
When a homebuyer borrows more than 80% of the purchase price of the home, the lender will require the borrower to pay estimated annual property taxes and homeowner's insurance each month as part of the mortgage payment. This money is deposited into a special escrow account. An escrow account is usually non-interest bearing and is used strictly to accumulate these funds. The lender will then pay the property taxes and insurance, when due, directly from these funds. Any overpayments must be refunded to the borrower each year. If your downpayment is 20% or more or the purchase price, you may elect to establish an escrow account with your lender. Many people find it more convenient this way.
FHA Loan
FHA loans have, traditionally, required a 3% down payment. While they still have this requirement, the HFA now allows you, the homebuyer, to be given the 3% down payment as a gift.
"Gift donors" are restricted primarily to a relative of the borrower and certain organizations, such as a labor union or charitable organization ("Mortgage Credit Certificate"). Verification of the source of the gift money is not required but these funds must be deposited prior to applying for loan approval and proof of deposit is required.
A "Bridal Registry Account" is another way for first time homebuyers to accumulate the 3% down payment needed for an FHA loan. This program allows a couple who are getting married to open a bridal registry savings account with an FHA approved bank. Family & friends can then deposit cash, shower & wedding gifts directly into an interest-bearing account to be used as a down payment.
"Private Mortgage Insurance" is required whenever a buyer's downpayment is less than 20% of the purchase price of the home. This is an insurance policy, paid by the buyer on a monthly basis, to protect the lender in case of foreclosure. The amount of PMI varies based on the amount of the downpayment and the ratio of the downpayment to purchase price referred to as the 'loan to value', or LTV. The monthly PMI is factored with your monthly payment by the lender when qualifying for your loan. PMI may not significantly add to your monthly payment. For most first time buyers, PMI will add less than $100 to your monthly payment.
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