Essential Mortgage Terms You Need to Know
Why Knowing Mortgage Terms is so Important
Knowing Mortgage Terms is critical to any real estate investor because these terms outline the financial agreement between the borrower (in this case, the real estate investor) and the lender. Mortgage terms have the potential to shape the entire investment experience. To avoid confusion and costly mistakes, understanding how mortgages work is essential.
Common Mortgage Terms You Should Know
Below is a list of common mortgage terms you need to be familiar with:
- APR : Annual Percentage Rate
- ARM : Adjustable Rate Mortgage
- Amortization : The process of repaying a loan in regularly scheduled payments
- Points : Payments made to a lender in order to lower the interest rate
- Prepayment Penalty : A fee imposed by some lenders if you pay off your loan early
- Origination Fee : A fee the lender charges to cover the administrative costs of making a loan
- Mortgage Insurance : Insurance that protects lenders from potential losses
- Escrow Account : An account you set up with your lender to make sure the taxes and insurance payments are made on time
- Closing Costs : Costs associated with your loan, such as appraisals and title searches
Understanding APR
One of the most important terms to understand is Annual Percentage Rate (APR). This is the rate the lender charges the borrower to borrow money, including interest, fees, and other costs associated with getting the loan. The APR can help you compare different loan options and make sure you get the best deal possible.
Understanding ARM
Another important term to be familiar with is Adjustable Rate Mortgage (ARM). An ARM is a loan that has an interest rate that can change over time. It can be appealing to borrowers since it often offers a lower initial rate than a fixed-rate loan. An ARM comes with a lot of risks, however, so you should make sure you understand the terms and conditions of the loan before you sign on the dotted line.
Understanding Amortization
Amortization is the process of repaying a loan in regularly scheduled payments. As you make payments, your loan balance decreases and your equity in the property increases. This helps to make sure that, over the life of the loan, the borrower and the lender each share in the costs of the loan.
Understanding Points
Points are payments made to a lender in order to lower the interest rate on the loan. The amount of points the borrower pays is typically either a percentage of the loan amount, or a flat amount.
Understanding Prepayment Penalty
A prepayment penalty is a fee imposed by some lenders if you pay off your loan early. If you think you might need the flexibility to do this, make sure you ask your lender about any potential penalties you might incur.
Understanding Origination Fee
An origination fee is a fee the lender charges to cover the administrative costs of making loan. This fee is typically anywhere from 1 to 10 percent of the loan amount.
Understanding Mortgage Insurance
Mortgage insurance is insurance that protects lenders from potential losses. It is usually required when the borrower has a smaller down payment or is deemed to be a higher risk by the lender.
Understanding Escrow Account
An escrow account is an account you set up with your lender to make sure your taxes and insurance payments are made on time. The lender collects the payments in an escrow account throughout the length of the loan and then pays the bills when they’re due.
Understanding Closing Costs
Closing costs are costs associated with your loan, such as appraisals, title searches, and other fees charged by your lender. These costs typically range from 2 to 5 percent of the loan amount.
Conclusion
Being familiar with the essential mortgage terms is the key to making wise real estate investments. Armed with this knowledge, you can make better decisions to help you reach your investing goals.