Tuesday, March 20, 2007
Basic Home Loan Terms Explained
The fantastic human race of home purchasing can sometimes overpower the first clip homebuyer. They are inundated with information riddled with terms of art. ARMS, points, interest rates, good religion estimates, pay-downs, lock-in dates, so on and so forth. Though some or all of these terms may look somewhat foreign to you, make not get overwhelmed, there are simple accounts for each and every 1 of them.
Let us begin with the different types of loans there are. Typically all home loans autumn into two basic categories: mortgages and home equity loans. Mortgages are simply a loan against property that is secured with a "mortgage". This "mortgage" is basically a lien against the property until such as clip that loan is satisfied. So a mortgage is a loan against property that is secured with a lien against it.
A home equity loan is a loan that is also secured with a lien against the property. The home equity loan lien is secondary to the first mortgage on the home. This type of loan is based on the amount of equity in the house. Equity is the difference in dollars between the value of the home and the amount owed on it. Equity can be a positive number (the house is deserving more than than than what is owed) or can be a negative number (negative equity) which intends that there is more owed on the house than the house is worth.
A lien is simply a legal term that bespeaks that person other than the homeowner have a legal right and interest in the property. So, if the property is ever sold, all liens need to be satisfied - any money owed to anyone with a lien must be paid, otherwise the new proprietor may go obligated to pay the amount owed. A lien is against property, not a person. Typically in all existent estate transactions there volition be a statute title search that will uncover any liens against the property. This statute title search is basically an scrutiny over anyone and anything that may have got some legal interest, duty or right to the property.
If there are multiple home loans on a property the order they are paid in is the oldest to the newest. This is only a factor if the property is being sold for below what is owed. This is either through a "short sale" where the house is being sold by the homeowner for below the amount that is owed in the house. They will need approval from all lien holders in order to make this. This is also an issue if a house falls into foreclosure.
Within these two types of loans you will desire to cognize the difference between a fixed-rate mortgage and a variable rate mortgage. A variable or adjustable rate mortgage is an ARM. Fixed-rate mortgages have got the same interest rate from the first twenty-four hours of the loan to the last twenty-four hours of the loan unless it is refinanced. A fixed rate or variable rate loan will generally begin off for a clip time period of time at a specified rate and then after that period ends, if the loan have not been paid off or refinanced then the rate goes adjustable based on specific statuses put forth in advance - typically tied to the federal interest rate. An arm loan will have got typically a 3 or 5 twelvemonth time period during which the rate is lower than the going rate. This is used to lure would-be borrowers or assist borrowers have got lower payments for the initial period.
"Points" are often discussed in connexion with loan packages and interest rates. You can "pay down" an interest rate by paying points for example. What this agency is you can pay for a lower interest rate if you pay a specified number of points. Points are simply one percent of the loan amount. So a $100,000 loan compares to $1000 for every point.
Another term you will often here is PMI, private mortgage insurance. PMI is insurance for your lender when the amount you borrow is more than than 80% of the value of the property. In these cases the borrower needs to pay for this insurance policy. The computation for your monthly PMI payment is 0.5% of your loan amount divided by twelve.
Tied to the computation of PMI, as well as many other factors of the loan is an appraisal. An assessment is a determination by a existent estate professional person of what the value of the property is. They will measure the property and similar places in the area. They will see market trends, recent sales and other factors to give an estimation on what the property is deserving and would sell for.
Another possible add-on to your monthly payments is escrow payments. Escrow is money that is being held typically to pay taxes. Your lender will accumulate 1/12 of your annual taxes every calendar month in order to be assured that your taxes are paid. Your lender then do your required tax payments. Typically your lender will have got a shock absorber in the escrow account of 2 - 3 calendar months in lawsuit you fall behind in your payments.
Though there are many more than terms you may meet these are the most often used, misunderstood terms. During the home loan process, however, you should never experience abashed or ashamed to inquire what a term means. The more than you cognize the better off you will be.