Ah, the mortgage. The word comes from Old French, which came from Latin, and literally means “death pledge.” Not the kind of history you want tied to your homeownership dreams! Today, getting a mortgage isn’t all gloom and doom. It is, however, a labyrinth of questions, abbreviations, and math. Is a balloon mortgage fun? It sounds fun. What are ARMs (other than the set of limbs dangling from your torso)? And just how many acronyms does a person need to talk about their mortgage?! We answer these questions and more in our Mortgage 101 series, articles to get you up to speed and on your way to becoming a mortgage expert.
Mortgage Terms and Definitions
Let’s get right to it by addressing what a mortgage is, exactly. A mortgage is a financial instrument in which property, i.e. land and whatever is permanently on it, is pledged by a borrower (the home buyer) to a lender (the bank or lending institution) to secure the repayment of a loan. There are many different types of mortgage loans, some of which you may already be familiar with.
Types of mortgages
Adjustable Rate Mortgage (ARM)
A mortgage loan using a variable interest rate based on changes in a specified index. More complex than the fixed rate alternative, an ARM could result in variable monthly payments.
A non-amortized or partially amortized (meaning low or no monthly payments initially) short-term loan for which the full balance becomes due at a predetermined date.
Conventional Mortgage Loan
A mortgage loan which isn’t insured or guaranteed by the government. A variety of loan programs fall under this category and may feature lower costs for homeowners.
Fixed-Rate Mortgage (FRM)
A mortgage loan in which the set rate of interest remains unchanged throughout the term of the loan. This means the total payment stays the same, making budgeting a bit easier.
Fully Amortized ARM
An ARM with a monthly payment that is sufficient to amortize the remaining balance. That is, for the balance to be fully paid off at the interest accrual rate by the set term end.
Home Equity Line of Credit (HELOC)
This is a revolving source of funds secured by your home which allows the homeowner to borrow money in different increments from the loan as needed.
A mortgage loan that requires payment of the interest only, not the principal balance, for a specified period.
A mortgage that is larger than the limits set by the Federal Housing Finance Agency. These loans exceed loan-servicing limits of Fannie Mae and Freddie Mac (more on these below), and typically carry a higher interest rate.
Related Mortgage Terms
You’ve probably seen these terms floating around. Or maybe you’ve had them thrown unceremoniously at you during your home search without so much as a “how do you do”. Whatever the case may be, these mortgage terms are relatively common and it pays (actual money in your pocket!) to know what they mean.
The process of reducing the value of a loan in intervals over a set term. Thus, an Amortization Schedule details each payment instalment going to your principal and interest over time.
Annual Percentage Rate (APR)
The yearly rate of interest charged to a borrower calculated over the life of the loan.
Loan-to-Value (LTV) Ratio
The relationship between the amount of a mortgage loan and the appraised value/purchase price of the property, expressed as a percentage. It is used to gauge how risky a loan to a potential borrower might be.
A specified period of time for which a lender will guarantee a specific interest rate, to be paid at closing.
An analysis of a buyer’s ability to afford the purchase of a home in order to give an estimate of how much the borrower can expect to receive. It entails a review of your income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
An acronym for the four parts of a monthly mortgage payment. Principal is the portion of the payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance.
An acronym for private mortgage insurance that protects lenders against borrower defaults. It is generally required on conventional mortgages when a buyer cannot afford a 20% down payment.
What about refinancing?
Great question! To refinance your home means to pay off one loan with the funds from a new loan using the same property as security.
Worried about budgeting for your mortgage? Use the Raboin Realty Mortgage Calculator to find out how much mortgage you can take on.
Other Mortgage Terms (and Names) You Should Know
If you don’t know Fannie Mae and Freddie Mac, you could be missing out! These organizations, among others, help home buyers with their mortgages.
The Department of Veteran Affairs
This federal government agency offers long-term, low or no down payment mortgages. Veteran Affairs (VA) Home Loans are issued by private lenders and guaranteed by the agency to assist service members, veterans, and eligible surviving spouses with homeownership.
The Federal National Mortgage Association (a.k.a. Fannie Mae) is a privately-owned company that provides funding for mortgages by buying them from banks or other non-bank lenders. It then makes these available for people in low, moderate, and middle income families.
The Federal Home Loan Mortgage Corporation (a.k.a. Freddie Mac) is a government-sponsored enterprise that issues varying security products to help make mortgages available to families, including low-income and minority families.
Learn more about financial assistance programs for home buyers. And if you’re already in the process of applying, here are some expert tips to save you money on your next mortgage.
There are many factors that will affect the kind of mortgage you can get, not least of which is your knowledge of the process, terms, and resources available. A lack of knowledge can lead to common home buying mistakes. Stay tuned for upcoming editions of our Mortgage 101 series and find out everything you need to know about getting a mortgage that works for you.
Feels like a lot to learn and not a lot of time to do it in? We’ve got you covered! From A to Z, the Raboin Realty team knows home buying in and out. Let us help you with your questions today.
Call (701) 543-2200 or email [email protected] to speak with a real estate expert.