Mortgage Alphabet Soup: Terms To Know
The process of getting a mortgage can feel a bit like learning a new language. While most prospective buyers go into the process with a basic understanding of the terminology associated with mortgage loans, they can quickly many become lost in the jumble of letters, numbers and confusing financial terms. Understanding the five terms below will give any buyer a head-start of mastering the mortgage lending lexicon.
What is PMI
This common term stands for Private Mortgage Insurance, and buyers are typically required to pay it monthly if they put less than 20 percent down on the home. It protects the lender in the event that the buyer defaults on the loan.
What is 5/1 ARM
A 5/1 is the most common type of Adjustable Rate Mortgage, and it means that the interest rate on the loan will remain fixed for the first five years, before becoming subject to market fluctuations at least once per year thereafter.
What is a 1003 Form
This is the formal name of the mortgage application form every buyer is required to fill out. Also known as the Uniform Residential Loan Application, it is the first step in getting approved to purchase the home of your dreams.
What is Amortization
This one trips up many a would-be buyer but, in short, it means spreading out loan payments over a series of years, typically 15 or 30. An amortization schedule is laid out at the start of the loan, and shows how a loan’s value will be measured over time.
What is an Escrow Account
The idea of funds being held “in escrow” prior to closing can be a head-scratcher for a first time buyer, but the escrow account simply means a separate account administered by the mortgage lender. Things like property tax and insurance payments are from this account as the home transfers from seller to buyer.
The home buying process can be confusing and stressful, especially for new buyers. Luckily, most real estate professionals and mortgage lenders are more than willing to answer questions and explain confusing terminology. Don’t be afraid to ask!
Image via Flickr/jameslupori