Financing Terms 101: Get the Skinny on All that Money Talk

Sometimes when gearing up to purchase a new home we can feel as though we are having to learn a whole new language. There are a lot of terms used in financing that can make our eyes glaze over. Let's talk about some of these terms, what they mean to you, and break them down into easy, understandable and useful tools...

Adjustable Rate Mortgage: This a mortgage whose rate of interest is adjusted periodically to reflect market conditions. This type of loan can be beneficial for buyers who know that they do not want to live in the home they are purchasing for more than the number of years before the adjustment period. It would also be a good option for those who feel that the the home they really want is not affordable with another type of loan, because of current salary, but who expect to have a significant salary increase before the first interest rate adjustment. Also, this type of loan can be helpful for those who intend to refinance the loan before the first rate increase. Keep in mind that there are risks to this type of loan. Talk it over thoroughly with an experienced mortgage professional to be sure you understand all that is involved.

The Annual Percentage Rate (this can be fixed or adjustable) is the rate of interest that will be paid back to the mortgage lender. An annual percentage rate (APR) is a broader measure of the cost to you of borrowing money. The APR reflects not only the interest rate but also the points, mortgage broker fees, and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate.

Amortization is the process of paying off a debt (in this case for a mortgage) over time through regular payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance.

Appraisal -This is required when taking out a mortgage and is an estimate of the value of property made by a qualified professional called an "appraiser.” The figure is based on an appraiser's knowledge experience, and analysis of the property.

Closing Costs” Closing costs are fees paid at the closing of a real estate transaction. This point in time called “the closing” is when the title to the property is conveyed to the buyer. Closing costs are incurred by either the buyer or the seller depending on the market. Sometimes when a home is on the market for a while, the sellers will offer to pay the closing costs to entice buyers.

Debt to Income Ratio: Your debt-to-income ratio is a valuable number. It is exactly what it sounds like. The amount you owe, compared to the amount you make. Your mortgage professional will run these numbers to determine the amount of the loan that you can qualify for.

Don't let the terminology scare you. Do your research, and make a list of any questions that you have to be sure you understand all of the terminology used. Let me know how I can help, I am passionate about helping my clients fully understand the loan process, and to get you into the home of your dreams!