The Rosetta Stone of Home Loan Terms

When visiting a foreign, exotic location, you always try to learn at least the basic terms of the country. Well, one could argue that the mortgage industry is definitely a foreign world. Before visiting, you should have an understanding of the following terms.

A deed-in-lieu is a subject you really want to avoid, but it is coming up more and more. When a borrower is about to be foreclosed on, a lender will sometime take this deed. The borrower loses the home, but avoids the cost of foreclosure.

If you are cash rich at the closing, you might want to investigate paying a discount point. It is the equivalent of one percent of the loan amount. By paying it, you can pay down the interest rate on the loan and save money over time.

When is the best time to start the loan process? This is a common question and leads us to the term pre-approval. You want to get pre-approved for a loan and lock in an interest rate. This allows you to shop for a home knowing exactly what you can spend.

Refinancing is one of those terms that sound fairly basic. It is. One refinances to pull cash out of equity or just to get a better interest rate or monthly payment. Be aware, however, that your original loan may have a pre-payment penalty.

The adjustable rate mortgage, better known as an ARM, is a common mortgage loan that has an interest rate that adjusts according to some index such as LIBOR. The interest rate can go up or down, but usually has a cap on how much it can move in a certain period of time.

The infamous balloon mortgage is one of those loans that can lead to catastrophe. The loan offers low initial payments and rates, but there is a big catch. After a set period of time, such as seven years, the entire amount comes due.

Equity is obviously an important aspect of your home. You want as much as possible. One way to increase it is sweat equity. This is improvement of the property through your own efforts. Think Home Depot and weekends!

How does one tell who really owns a home? You look at the title. Title can be a complex subject, so you want the lender to do it. Lenders will actually require the hiring of a title insurance company to check the title and insure that it is free and clear. You have to pay for the search.

Private mortgage insurance is an annoying aspect of buying a home. It protects lenders from some of the losses that can happen if a borrower defaults, but the borrower is required to pay for it! Put more than 20 percent down and you can avoid it.

Applying for a mortgage can be a hectic and stressful process. This is particularly true for first time borrowers. Before you go through the process, take the time to learn the language. Not only will you understand what is being said, but also you’ll be able to respond!

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