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Let’s clarify some common mortgage terms to help you navigate the process and make informed decisions when securing a home loan.
Down Payment
A down payment is the amount of money you pay upfront when buying a home, usually a percentage of the home's price. Ideally, a 20% down payment is recommended, as it helps you avoid private mortgage insurance (PMI) and lower monthly payments. However, if you're eligible for an FHA loan, you can put down as little as 3%. The larger your down payment, the less you'll need to borrow from the lender.
Closing Costs
When you’re buying a house or getting a mortgage refinance, closing costs are part of the contract. The average home buyer pays about 2-5% of the loan amount in closing fees. Usually, you’ll have a variety of fees such as: your application fee, attorney’s fees, administrative or processing fees, insurance fees, property taxes, and expenses from the title company.
Interest Rate
This is the cost you’ll pay each year to borrow the money on your home loan. The lower the interest rate percentage, the more you’ll save over the life of your loan (which is a good thing, of course). Many homeowners choose to “lock” their interest rates 60-90 days before closing on their home loan to avoid potentially rising rates.
Escrow
When you purchase, build, or refinance a home, an escrow account can be set up to pay your property taxes and insurance premiums for you. A part of your monthly mortgage payment will go toward this account. Each year, the escrow account will be analyzed to determine any changes in what is owed for property taxes and insurance payments.
Equity
The easiest way to understand home equity is start with your home’s value and subtract the amount that you owe on your mortgage. Equity can increase with a healthy real estate market, home improvements, and general upkeep. With most mortgages, the more you pay on your home loan, the quicker your equity builds.
Homeowner’s Insurance
Just like you need insurance for your car, you also need it for your home. You may want to get several quotes from various insurance companies to get the best rate for your policy. Your rates are usually based on when the home was built, where the home is located, square footage, etc. It’s recommended you review your policy every few years to coverage any changes that need to be made.
Amortization
This is the process of spreading out a home loan into a series of fixed monthly payments over a period of time. Your total payment remains the same, but your payment is made up of parts of your mortgage that may change over time. A portion of each payment will include the interest costs and your loan principal (or your mortgage balance). Amortized loans are designed to be paid off over a set period of time (i.e. 15, 20, or 30 years).
These are just a few mortgage terms to wrap your head around, but if you have additional questions regarding loan products, mortgage insurance, or other terms not covered here, please contact a Churchill Home Loan Specialist.
