Mortgage Terms You Should Know

Mortgage Terms You Should Know

Have you ever heard someone in the mortgage industry use a bunch of terms that you didn't know? We're here to help. Here are some common terms used in the industry to help educate you.

When shopping for a mortgage, you may get overwhelmed by the process if you don’t know what to expect. One thing that can discourage you is when lenders and others that you talk to throw around terms that you don’t know. Here are some terms you will run into when getting a mortgage so you know what others are talking about.

Amortization Schedule
This term refers to the schedule of repayment for the mortgage loan. The table breaks down the interest, balance, tax and insurance payment as well as any other fees or charges that the mortgage borrower is responsible for.

When referring to a home, the equity is the amount you have invested in the property. In short, it is the difference between the home’s value and the balance you owe on the home. For example, if the home is worth $120,000 and you owe $100,000, you have $20,000 of equity built up in it.

Escrow is basically a third-party which keeps any money or objects of value until the home purchase goes through. Escrow accounts are generally used for the borrower to deposit money for taxes and hazard insurance before the deal is final. After closing, the mortgage lender then uses that money to pay those fees when they come due.

Fannie Mae and Freddie Mac
These are the two government agencies that purchase mortgage loans from the lenders.

Fixed-Rate Mortgage
A fixed-rate mortgage is on in which the interest rate and monthly payments are the same throughout the term of the loan. The interest rates never change and, as a result, the monthly payments remain the same as well.

Adjustable-Rate Mortgage
With an adjustable-rate mortgage, your monthly payments will fluctuate depending on the current interest rates.

Grace Period
A grace period refers to the number of days following the payment due date which you can pay your bill without getting charged late fees. Grace periods are only for mortgage loans in which the interest gets calculated each month.

Mortgage Rates
This refers to the current interest rates that banks are charging. Currently, they are hovering around five percent. However, mortgage rates are increasing which means paying more overall during the term of the loan.

Homeowners Insurance
A homeowners insurance policy is vital for protecting your most expensive investment. In some cases, you will be required to have a homeowners insurance policy because the lender requires it to protect their investment as well.

Housing Bubble
This refers to a significant increase in home prices doe to the expectation that the prices will continue to go up.

These are just a few of the more common terms you will encounter when searching for a mortgage loan. Hopefully, knowing these terms will make the shopping around process a little bit easier and understandable for you.

Is a 40-Year Mortgage a Viable Option for You?

Is a 40-Year Mortgage a Viable Option for You?

The 40-year mortgage is becoming more and more common in the housing industry. Is a 40-year mortgage right for you?

In the mortgage industry, the 40-year mortgage is a relatively new concept. Most mortgages do not go past 30 years and the 40-year option has only been available as a niche product for certain home buyers. However, they are becoming more and more mainstream as home buyers are looking for more affordable options when making the leap into buying a house.

With a 40-year mortgage, the borrower pays a lower mortgage payment each month than they would if they took out a 30-year mortgage. That’s one of the appeals of the longer mortgage option. However, it does have its disadvantages, too. Since the loan is spread out over an extra 10 years, the borrower will pay much more by the end of the loan term in interest and other charges.

Another problem with 40-year mortgages is that you are likely going to pay higher mortgages rates with this option. We already know that mortgage rates are starting to go back up for 30-year fixed loans, but you can expect to pay an extra quarter of a point or more when you choose a 40-year mortgage over a 30-year mortgage.

One of the reasons 40-year mortgages are not as popular is because the lenders are unable to sell those types of loans to investors through Fannie Mae, Freddie Mac and other government-sponsored enterprises. The mortgages stay on the books for too long and the money gets tied up longer than investors like.

Before agreeing to a 40-year mortgage, there is one question you should ask yourself: Is this home more than I can afford? If the only way you can afford the home you want to purchase is by taking out a 40-year mortgage on it, it may be wise to search for a less expensive home that you can afford with payments spread out over a 30-year period. Many financial gurus like Dave Ramsey and others suggest that you only buy a home you can afford on a 15-year fixed rate mortgage.

This is not to say that you should never go with a 40-year mortgage. However, you should always way all of your options before making your final decision on any type of mortgage. Have you considered an interest-only mortgage? Or have you looked at the adjustable rate mortgages that are available? Often these types of mortgages offer a lower interest rate that can help bring your monthly payments down to a more affordable range as well. Be sure to do your homework before making a 40-year commitment that will take you into your retirement years.

Four Tips to Save for a Down Payment

Four Tips to Save for a Down Payment

A look at savings strategies to build up funds for your home purchase down payment.

The first financial challenge when you're thinking about buying a home is how to come up with the down payment.  These days, it's rare to get a mortgage without contributing some of your own cash. And if you're trying to buy a home that was foreclosed or through a short sale -- where the purchase price is below the amount owed on the house -- a larger down payment can speed up the process.  A low credit score, however, may drive up the size of the required down payment.
Here are some tips to save up your down payment.
1. Decide how much house you can afford.
The first step is to set your savings goal. Research home prices and determine how much you can afford. Calculators can be found on most bank websites and on the FHA site at
The median price of existing homes in the U.S. is $165,100, according to the National Association of Realtors.  A 5 percent down payment for a home that price would be $8,255. A 20 percent down payment would be $33,020. If you're able to save 20 percent, lenders will not require you to purchase Private Mortgage Insurance, which will reduce your monthly expenses.
2. Set up a savings plan.
You'll also need to create a savings plan and set a deadline for reaching your goal. One method is to find the difference between your current housing costs and your projected monthly mortgage payment, and put that much away each month.
This system has the advantage of allowing you to decide if you really earn enough to afford the home you want. 'In some cases, if a homeowner is paying a low rent, doubling that payment can be quite a shock.
Open a separate savings account for your down payment to minimize the temptation to tap the money for other needs. Also setting up automatic transfers to your new account will lessen the chance you'll spend the money elsewhere.
3. Pare back expenses and raise cash.
Review your spending habits and determine where you can find extra cash. If you're determined to buy a house as soon as possible, try tightening your budget. Start by putting away the credit cards. Then cut out cable TV, switch to a less expensive cell phone plan and reexamine other aspects of your spending until you've pared back to just necessities. Use coupons at the grocery store and stay away from the mall. Hold a garage sale or sell unused items online. There are dozens of books and blogs you can turn to for frugal living advice that can help accelerate your savings.
4. You may qualify for assistance.
If you're hoping to take advantage of the down market but haven't got that much saved, you may be able to find help through various programs.
There are FHA-backed programs in every state. Most are aimed at low- and moderate-income, first-time homebuyers and usually require recipients to make some contribution. Visit the agency's website at to learn if you qualify for a program in your area.
The Veterans Administration and the Agriculture Department are among other government agencies that offer down payment assistance.