The mortgage application process can be a confusing one — especially if you’ve never gone through it before. There’s a lot of red tape, a ton of moving parts and, worse yet, dozens of terms and phrases you’ve probably never even heard of. Are you planning to buy a home in 2021? Here are the top five mortgage-related terms you’ll want in your arsenal:
1. Fixed-rate mortgage
There are two types of mortgages: fixed-rate and adjustable-rate. Fixed-rate mortgages have a set interest rate for the entirety of the loan. Adjustable-rate loans have interest rates that fluctuate after a certain amount of time. They’re best if you plan to move before the rate can adjust or if you’re willing to refinance not long down the line.
This is sometimes called “prequalification,” depending on your mortgage lender. It’s the first step in the homebuying process and is when the lender will do a quick assessment of your potential eligibility for a mortgage. They’ll need a small amount of information about your income and finances, and if all looks good, they’ll give you a preapproval letter stating how much money you can likely borrow. You’ll submit this with any offers you put in.
Once you find a house, your lender will want to be sure it’s worth the money you’re asking to borrow for it. They’ll send out an appraiser, who will analyze the property and local market to assess its worth. If it’s worth as much as (or more than) you’ve offered on the home, then you’re golden. If the appraisal comes in lower than that amount, you’ll need to renegotiate or make up the difference in cash.
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4. Earnest money
Earnest money is essentially a deposit you put down on a house you’re interested in. It shows the seller you’re serious about their property, and usually amounts to about 2% of the home price. You can offer more if you’re looking to get a leg up over other buyers.
As long as you go through with the deal, the deposit will go toward your closing costs and down payment. If you back out of the deal, the seller gets to keep it.
Most lenders require you to pay for home insurance and property taxes as part of your monthly payment. These funds are then put into an escrow account and held until your premium and taxes come due each year. In some cases, you may get a refund check if the lender over-estimated and your escrow account is particularly flush.
You’re not alone
There are tons more mortgage terms you’ll encounter along the way, but you don’t need to know them all now. Link up with an experienced loan officer or mortgage broker, and tap their expertise when you’re confused or need help. They’ll make sure you’re on the right track and that your home purchase is successful.