Diving into the world of mortgages? Understanding key terms can make a big difference in your home financing journey. At ONE Presidential Mortgage, we’re here to help you make sense of mortgage jargon. Here’s a breakdown of essential mortgage terms to get you started:
1. Principal
The principal is the amount you borrow from the lender to purchase your home. It’s the core amount of the loan that you repay over time.
2. Interest Rate
The interest rate is the percentage of the principal that you pay to borrow money. This rate can be fixed, meaning it stays the same throughout the loan term, or adjustable, meaning it can change at specified intervals.
3. Fixed-Rate Mortgage
A fixed-rate mortgage features a consistent interest rate and stable monthly payments throughout the life of the loan, providing financial predictability.
4. Adjustable-Rate Mortgage (ARM)
An ARM has an interest rate that may change periodically based on market conditions. It usually starts with a lower rate but can fluctuate, impacting your monthly payments.
5. Term
The term is the length of time over which you repay your mortgage. Common terms are 15, 20, or 30 years. Shorter terms mean higher monthly payments but less overall interest.
6. Amortization
Amortization is the process of gradually paying off your mortgage through regular payments. Initially, payments cover more interest, but over time, they reduce the principal balance.
7. Down Payment
The down payment is the amount you pay upfront towards the purchase price of the home. A larger down payment reduces the loan amount and may lower your interest rate.
8. Private Mortgage Insurance (PMI)
PMI protects the lender if you default on the loan and is usually required if your down payment is less than 20% of the home’s price. PMI can often be removed once you build sufficient equity in your home.
9. Escrow
An escrow account holds funds for property taxes and insurance. Your monthly mortgage payment includes an escrow portion to cover these expenses.
10. Prepayment Penalty
A prepayment penalty is a fee some lenders charge if you pay off your mortgage early. This compensates the lender for lost interest income.
11. Loan-to-Value Ratio (LTV)
LTV compares your loan amount to the appraised value of your home. A lower LTV ratio is favorable and may result in better loan terms.
12. Closing Costs
Closing costs are fees associated with finalizing your mortgage, including appraisal fees, title insurance, and loan origination fees. These costs generally range from 2% to 5% of the loan amount.
13. Underwriting
Underwriting is the process of evaluating your financial information, such as credit history and income, to determine if you qualify for the mortgage.
Grasping these key mortgage terms will help you navigate the home financing process with ease. At ONE Presidential Mortgage, our team is dedicated to guiding you through every step of your mortgage journey.
For personalized advice and to explore your mortgage options, reach out to us today!
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