Mostly everyone who has ever had any experience with an Ortley Beach real estate transaction or the purchase or sale of any property has had experience with a mortgage. Unless the real estate purchase is being paid for in full at the time of closing, a buyer will need to obtain a mortgage. With how important these loans are, it’s important to be familiar with some vocabulary associated with them. Purchasing a home can be stressful enough. We hope that by understanding some of these terms more, the overall buying process will be more enjoyable for you. A mortgage is often the first step in your journey so starting off on the right foot is the best way to set yourself up for success.
Ortley Beach Real Estate Can be Confusing
We understand. Real estate can be very confusing. There are a lot of terms that you’ve never heard before. And may never hear again. However, that doesn’t mean you shouldn’t learn a little about it. The more you understand, the better you will be able to navigate through the home buying process. Here’s a headstart on mortgages.
Adjustable-rate Mortgage (ARM)
This type of mortgage applies varying rates of interest over the life of the loan. This also means the monthly payments may differ month to month. The interest rate is based on market value. One advantage to an ARM is that many lenders will give you a short period where your interest rate does not vary. This interest rate is often lower than a fixed-rate mortgage. All ARMs also have caps which limit the amount that your interest can increase or decrease.
Unlike an adjustable-rate mortgage, a fixed-rate one has the same interest rate for the life of the loan. The benefit to this type of mortgage is that no matter what the market does, your interest rate remains the same. Many homeowners enjoy the uniformity of the payments and the stability of this type of loan.
The Federal House Administration (FHA) offers this type of mortgage to people who may have trouble obtaining a loan due to a low credit score or not being able to make a 20% down payment. The loan is insured by the government and protects the lender if the loan is defaulted on.
Debt-To-Income (DTI) Ratio
Basically, the percentage of what your average monthly debts (including credit card bills, loans, and other recurring monthly payments) divided by your monthly income. This is extremely important because lenders look at this number to make sure that you have enough income coming in monthly in your household to cover the loan. Typically, a DTI of 43% is the highest percentage allowed in order to be considered for a loan. That said, the lower the better and many mortgage lenders won’t consider someone with a DTI more than 36%.
Private Mortgage Insurance (PMI)
If your down payment is less than 20% of the home’s purchase price, a lender will require you to get mortgage insurance. This protects the lender if you should stop making payments on your loan. Once you reach 20% equity in your property, you usually have the option to remove this from your loan.
Performed by a certified appraiser, this gives an educated value of the property that is for sale. It is an important term to know. This number is what the mortgage lender will use to determine the amount of loan they will approve for you. It ensures that the amount of the loan does not exceed the value of the home. We have a number of certified appraisers on staff including Eric Birchler in our Ortley Beach real estate office.
This is a set of fees paid to the lender to cover the costs incurred in the process of getting your loan. These may include, but are not limited to, title search fees, pest inspections, attorney’s fees, appraisal fees, and title insurance. The amount is customarily about 3% of your total loan amount.
This is an account set up at no cost by your mortgage lender. In this account, your lender will hold money that they will use to pay for property taxes and homeowners insurance for you. Most people opt for this because this lets you divide these payments into small monthly payments rather than paying a large bulk once a year.
This is the amount of money you will be paying at closing towards the purchase of the home. Typically, this is 20% of the price. While many people think that 20% is required, there are many types of loans that accommodate those who cannot make that type of payment.
There is So Much More to a Mortgage
This is very much just the tip of the mortgage vocabulary iceberg. Buying a home or purchasing property in the Ortley Beach real estate market can be confusing. There are a lot of terms that some people only hear a handful of times in their lives. While this may not explain the whole process from beginning to end, we do hope it will help you feel more comfortable the next time you have to discuss a mortgage. No matter where you are in your home buying process, one of our experienced agents can help guide you through the process.