10 mortgage terms everyone should know

Once you’ve taken that big step and decided you’re ready to stop dreaming and start looking to actually buy a home, you’ll come across a variety of new vocabulary words. At times it might seem like the specific mortgage terminology is a bit much, but with a little practice you’ll be speaking like a native.

Here’s a mortgage glossary with 10 essential terms.

Adjustable-rate mortgage (ARM)  A mortgage with an interest rate that changes based on a standard financial index, which means your interest rate may go up or it may go down. Most have limits on how high the rate can go.

Annual percentage rate (APR) — A way of calculating the annual cost of your mortgage by factoring in interest, mortgage insurance, points and more. All these factors make the APR higher than the interest rate a lender quotes.

Balloon mortgage  A loan that offers low monthly payments for 3–10 years. After this time period, a borrower must pay off the principal balance in a lump “balloon” payment.

Escrow  An account that holds the money and paperwork in an account until all conditions of a sale are met.

Fixed-rate mortgage — Unlike an ARM, this type of home loan offers an interest rate that remains the same, or “fixed,” for the life of the loan — anywhere from 10–50 years.  

Interest-only mortgage  An ARM that gives borrowers the option to only pay the interest for a period of time.

Jumbo mortgage  This type of home loan exceeds the conforming loan limit, which is currently about $400,000 for most of the United States. Because of the risk associated with their size, rates on these loans are usually one-eighth to one-quarter of a percentage point higher than normal loans.

Point — One point equals 1 percent of the mortgage loan. You’ll hear this in the context of “discount points” offered to reduce the loan's interest rate.

Private mortgage insurance (PMI) — A monthly insurance policy you usually have to pay into if you make a down payment that is less than 20 percent of the home’s sale price. Once you have built up 20 percent equity in the property, the PMI should be dissolved.

Two-step mortgage —These mortgages feature a fixed rate at the beginning and then are adjusted to another fixed rate (depending on whether the market this may be higher or lower) for the rest of the loan period.

If you’re looking for more tips on how to find that perfect house, talk to a Coldwell Banker Hedges Realtor® today. They have the experience to guide you through the entire process.

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