Getting mortgage can be a little frustrating especially if it’s your first time. In order to under the whole process of getting a loan for home buying firstly it is important to understand the terms used by mortgage specialists. Once you understand all the basic terms it’ll save from a lot of confusion. Following are some important and basic mortgage terms that you should know before confronting your mortgage specialist.

  1. Fixed-Rate Mortgage

Fixed rate mortgage is the type of mortgage that allows a fixed amount of interest rate over the mortgage over a certain period of time usually 15-30 years.  Although fixed rate mortgage seems n affordable option but it has its own disadvantages as well.

  1. Adjustable Rate Mortgage/ ARM

Adjustable rate mortgage is the type of mortgage in which interest rate keeps changing according to a standard and external factors. Usually there is a limit to which ARM can be changed. Homeowners have a choice between adjustable rate mortgage and fixed rate mortgage.

  1. Two-step mortgage

This type of loan involves two steps, a loan with a fixed rate payment plan for the first period, an adjustment, and then a fixed rate payment plan for the rest of the loan term. This means that there is an initial fixed period of 2 years, an adjustment, and then 28 more months of payments following the adjustment.

  1. Balloon mortgage

This is the type of mortgage during which borrowers can pay low monthly payments for some period say 3-10 years and after that period they have to pay the remaining amount as one bulk payment (balloon payment). Some people convert this amount into fixed or variable rate mortgage. People usually choose this type of mortgage when they do not plan to stay in their house for a long period. In that case they sell the house before the balloon payment is due and pay the remaining amount. In case they do not sell their home before the payment is due, they have to refinance their loan.

  1. Residential Mortgage

This is the type of loan that is secured by residential property.

  1. Jumbo Mortgage

The mortgage that exceeds the conforming limit is jumbo mortgage. However rate on jumbo mortgage are higher than conforming mortgage.

  1. Discount Points

Discount points are one time upfront closing cost which allows you to access a discounted price for your mortgage as compared to the market price. This amount is considered as mortgage prepaid amount hence tax deductible. In general terms, it means that if you pay one discount point at closing it will lower your mortgage by 25%. One point is equal to one percent of loan amount. When discount points are paid, the bank collects a one-time fee at closing in exchange a lower mortgage rate to be honored for the life of the loan.

  1. Origination Fee

This is the fee that lender charges you on getting into the mortgage to proceed the mortgage process.

  1. Margin

These are points that are added to the index to determine the rate of your adjustable rate mortgage after each adjustment.

  1. Down payment

This is the amount that the buyer pays in cash as the purchase price of the home but this amount is excluded from the mortgage cost. Lenders usually demand a down payment between 5-25% of the purchase price of home. Buyers can reduce their mortgage amount by paying a huge down payment. If your down payment is less than 20%, you may need to buy private mortgage insurance to protect the lender before your loan is approved.

  1. Points

These are another form discount points which are paid to the lender at the time of closing. Similarly one point equals to one percent of loan amount. Some lenders charge their clients ‘origination fee’ to precede the mortgage process.

  1. Collateral

This is the property that borrowers place as security against their mortgage. In any case, if borrower cannot pay back their loan, lenders are allowed to gain ownership of collateral in order to get back their money.

  1. Principal

The amount of debt left on the loan excluding the interest amount.

  1. Title Insurance

This means that the owner of the property has title to the property and he/she has right to transfer this title as well. In that case the title insurer will be responsible for any damage legally. This insurance can protect the lender, buyer or both.

Getting mortgage to buy a home is an important step in your life; don’t let the minor mistakes made huge problems for you. For more information regarding mortgage and its associated procedures contact us today at 905-216-5563.

 

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