Welcome to the SmartAsset Mortgage Dictionary. Below you will find a glossary of popular terms explained in plain English. No need to thank us, this is just what we do.
Annual percentage rate: This number allows you to make comparisons between loans offered by different lenders by giving you the total cost of the loan in combining the base interest rate and other add-on fees. This includes points, private mortgage insurance, closing costs and other fees that are charged by the lender. Not all APRs are calculated in exactly the same way, but SmartAsset can help you get to the bottom of the numbers.
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A mortgage broker acts as an intermediary between banks or other lending institutions and individuals looking to borrow money. The broker helps you to evaluate your financial standing and find loans from lending agencies that suit your situation. Individuals who don’t have the time to shop around on their own may choose to have a broker help them. Brokers do charge for their services, and if you want to avoid this extra fee, SmartAsset can find the best mortgage on the market for you free of charge.
This is a statistically derived number that is supposed to help lending agencies assess the likelihood that an individual will repay his or her debts. Your credit score is based in part on your past credit history and is expressed as a number between 300 and 850, the higher the number the better your score. The number is calculated using a mathematical formula that takes into account the numbers in your credit report compared to those of many other individuals. Your credit score is a very important number; if you plan to take out a loan, the interest rates and terms of the loan you can qualify for are contingent upon what kind of credit score you have.
When you buy a property, the down payment is the amount you pay upfront in cash towards the total value of the home. The remainder of the property value is then financed with your mortgage. The larger your down payment is, the smaller the mortgage amount and often the interest will be. A typical down payment is 20% of the property value, so for a $300k home, this would be $60k.
This term is the difference between the market value of your home and the amount you owe on it through an outstanding mortgage or any other loans on the property. For a home worth $300k, if you have an outstanding mortgage of $120k, your equity would be $240k.
The most common type of mortgage is a fixed-rate mortgage. For this type the interest rate and monthly payment will remain the same throughout the life of the loan, and these loans typically have repayment terms of 15, 20, 30 or 40 years. Fixed-rate mortgages are best for buyers who are likely to be in their home for a long time and want to know how much their payment will be every month. Interest rates for fixed-rate mortgages are higher than the starting interest rates for variable-rate mortgages.
The Federal National Mortgage Association, a well-known institution in the secondary mortgage market, buys mortgages from banks and other lending institutions to sell to investors. Only those mortgages that adhere to a very strict set of mortgage regulations are purchased, and the FNMA also guarantees repayment of these mortgages in principal and interest with a federal government guarantee.
The Federal Home Loan Mortgage Corporation shares a lot in common with Fannie Mae. It is also a government-backed institution in the secondary mortgage market that buys mortgages from banks and other lenders and gives opportunities to individuals with lower incomes to finance home purchases.
This used to be called a second mortgage, and with this loan, you borrow against the equity of your home. Because mortgage loans are tax-deductible and of lower interest rates than consumer debts, taking out a home-equity loan can be a strategic way of paying off consumer debt.
This is the rate lenders charge you to borrow their money expressed as an annual percentage. For a $240k 30-year fixed mortgage with an interest rate of 5%, over the life of the loan you would end up paying the lender $240k in principal and $228k in interest. The interest rate remains the same throughout the term of a fixed-rate mortgage but fluctuates according to market interest rates in a variable-rate mortgage. Interest makes up a part of your monthly payment on your loan.
A mortgage is a loan provided by banks and other mortgage companies to help you buy property. For example, if you wanted to buy a home priced at $300k, the numbers would look something like this. Your down payment would typically be 20% of the property value, so you would pay $60k, and the mortgage would cover the remaining amount of the home value, $240k. You will make monthly payments towards your mortgage that are part principle and part interest. You should think of a mortgage as a product; there are many different kinds available to those looking to purchase a house and you need to shop around to find the right one. Check our blog post “What is a Mortgage?” for some more mortgage basics.
Points are up-front fees that you can pay when you buy a home to lower your interest rate on the loan. One point comprises 1% of the loan value (for a $240k loan, one point equals $2,400). If you are planning to stay in your home for many years, buying more points makes sense and will save money you would have spent on a higher interest rate. The way to evaluate points is a little complicated but it may be easier to see in an example: if you were to buy 1 point on that $240k mortgage it would cost you $2,400. If we assume the monthly savings of that point are $40, we find that you need to plan on living in the home for at least 60 months for the purchase of the point to pay for itself (we calculate this by taking the total expense of the point $2400 and dividing it by the monthly saving, $40). If you plan to live in your home for only a short time, buying many points isn’t necessarily to your advantage. Points can be confusing because while they are all worth 1% of your loan, between lenders, they don’t lower your interest by exactly the same amount.
This is the amount you actually borrow for a loan. Interest is calculated on the principal. For a $240k mortgage, your initial principal is $240k. A portion of your monthly payment, not including interest or taxes and fees, goes towards paying off the principal you still owe on your mortgage. At the end of the first year, your principal in this example would be roughly $236k. You would have paid $16k in total, $12k in interest and $4k in reducing the principal balance from $240k to $236k.
To refinance means to take out a new loan to pay off an existing mortgage. Most people refinance to take advantage of lower interest rates and lower their monthly payment. This is something you might choose to do if you are financing your home purchase with a fixed-rate mortgage and during your loan term market interest rates fall significantly. Refinancing can be expensive and time consuming, but SmartAsset can help you decide if this is a smart move for you that will save you more in the long run.
If you itemize your taxes, you can save a lot of money by deducting the interest payments you make on your loan. While these deductions can be a big help, you have to keep in mind that you will also have property taxes if you are buying a new home (to make things more complicated your property taxes are also tax deductible). They generally fall between 1% and 3% of your home’s value, but SmartAsset can help you find out what property taxes are in a neighborhood where you are looking to buy.
Also known as an adjustable-rate mortgage (ARM): this is a mortgage whose interest rate and monthly payments will vary based on market interest rates. The first few years of a variable-rate mortgage have lower interest rates compared to fixed-rate mortgages, but after this term, interest rates fluctuate with market rates. Caps are set to limit the amount of fluctuation, but if you are considering a variable- rate mortgage, you should make sure that you are comfortable with potentially paying a higher mortgage payment in the future. Variable-rate mortgages are often great options for individuals looking to live in a home for a shorter time while the interest is still low; if you move before or soon after the interest rate starts to fluctuate, you can make significant savings.
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