Finding the right mortgage can be a bit like visiting a foreign country where you don’t know the language. Nobody is born knowing the difference between an APR and an interest rate. So don’t be ashamed if you can’t tell an option ARM from your elbow. But in order to make smart choices, you need to known the lingo. So here are seven terms to learn before you start mortgage shopping:
1. APR: The annual percentage rate takes into account not just the interest rate on a loan, but one-time costs such as discount points and origination fees. By comparing APRs, rather than just interest rates, you can better determine which loan is best for you.
2. Discount points: Fees you pay to your lender when you take out a loan in exchange for a lower interest rate. Each point is equivalent to one percent of the loan amount, or $1,000 for a $100,000 loan. Paying points can make sense if you intend to hold onto your loan for several years. Plug in the numbers yourself wiht the LendingTree Discount Points Calculator.
3. Option ARM: An adjustable rate mortgage that allows borrowers to decide how much to pay each month. The rate adjusts monthly, based on a pre-determined index. The borrower has the option of picking one of several payments offered each month, which typically include an interest-only payment, a minimum payment (usually less than interest only) or a more traditional (and higher) 15-year or 30-year payment. An option ARM can be a great choice for someone looking for flexibility in their monthly mortgage payment, but if used unwisely it can result in your loan balance increasing.
4. Origination fee: The fee you pay your lender to establish a new loan. It could be a set fee or a percentage of the loan amount. Some loans come without an origination fee, though they might come with a higher interest rate to make up for it.
5. PITI: An acronym for principle, interest, taxes and insurance, the four components that typically make up a monthly mortgage payment.
6. PMI: Private mortgage insurance, which is paid by the borrower and is often required by the lender when the borrower has a down payment of less than 20 percent. Talk to your lender about whether it makes sense to take out a piggyback loan to avoid paying PMI.
7. Preapproval: a certified thumbs-up from a lender – usually in the form of a letter that says how much you can borrow. Preapproval is one notch better than prequalification, because the lender will actually perform a credit check before granting it. Having that preapproval letter puts you in a better bargaining position during purchase negotiations, but you’ll still have to actually apply for the loan before getting final approval.
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