In the market to buy your very first home? It's an exciting process, but it can also feel a little overwhelming. After all, there's a lot to learn and many options to consider, especially when it comes to your mortgage.
Having the right information is key. Here's a helpful glossary of some important mortgage terms you'll need to know, so you can buy your place with confidence.
- APR & Rate
The borrowing cost for a mortgage is its interest rate, which is the percentage of your total loan balance (or principal) that you pay each month. The APR is your annual percentage rate: a calculation of how much you'll pay in interest over one year, often factoring in some lender fees as well. The APR is usually the best way to gauge the overall cost of your loan.
You have two options for your mortgage rate: fixed and adjustable. A fixed-rate mortgage means you'll pay the same rate for the life of the loan. Adjustable-rate mortgages (ARMs) start with a lower fixed rate, then readjust at predetermined intervals based on the current market rate.
Fixed-rate loans are a great option for many buyers because they protect against rising interest rates. But ARMs may help you save money upfront. Talk to your lender about your plans to see what makes sense for you.
- Closing Costs
In addition to the down payment on your home, you'll need to cover several other expenses before the sale is finalized. Your lender will provide a complete list of your closing costs, which typically include a mortgage origination fee, escrow fees, title fees, taxes, a recording fee, and insurance costs. All together, these amount to between 2% and 5% of your home's purchase price.
- Conventional Loan
Conventional mortgages are loans that are not guaranteed or insured through one of the government's special homebuying programs, which have unique guidelines and eligibility requirements. The most common non-conventional mortgages include FHA loans, VA loans, and USDA loans, which are designed to help qualifying homebuyers access lower down payments and competitive rates.
Your credit score – a measurement of your creditworthiness – is key to qualifying for a home loan. Higher scores lead to better mortgage rates.
Wondering if now's the best time to buy a home? Start by looking at your credit score. If you need advice or help with building your credit, our Credit Specialists are here to help.
- Down Payment
Your ability to qualify for a mortgage, and the rate you'll pay, is heavily influenced by the amount you pay upfront – your down payment. Buyers are commonly advised to put down 20% to avoid paying for PMI (see below), but most pay less. If the down payment will be a challenge, consider our low-down-payment options through Fannie Mae or Freddie Mac.
There's a lot more to your mortgage than just the loan. PITI stands for principal, interest, taxes, and insurance – homebuying expenses that comprise your monthly mortgage payment. Your insurance and real estate taxes will be paid through an escrow account that's funded with your mortgage payments.
When reviewing your mortgage application, your lender will compare your potential mortgage payment to your monthly income to make sure you don't stretch yourself too thin. As a rule of thumb, your housing costs shouldn't be more than 30% of your monthly income.
This stands for private mortgage insurance, which protects the lender in case a borrower defaults on their mortgage. It's required for homebuyers who put down less than 20%.
Mortgage points (or discount points) are optional fees you can pay at closing to lower your interest rate. It's essentially prepaid interest. You'll recoup the cost over time thanks to lower mortgage payments, but you'll need to own your home for a while to get the full benefit. Talk to your lender to see if buying points or making a larger down payment is the better option for you.
Along with finding a great real estate agent, getting preapproved should be one of your first steps. By applying for preapproval with a mortgage lender, you'll find out what kind of mortgage options and rates you qualify for, which will make it easier to set a realistic homebuying budget and avoid visiting houses that are out of your price range.
Because your lender has already reviewed your financials, being preapproved shows sellers that you're a serious buyer, which could give you an advantage when competing with other bidders. Plus, once a seller accepts your offer, being preapproved helps streamline the mortgage process as you enter the home stretch of your homebuying journey.
Here for Homebuyers
At Dover Federal Credit Union, we're here to answer all your financing questions and make getting your mortgage as easy and stress-free as possible. Plus, our LOW rates will help you enjoy your new home for a lot less money.
Learn more, get a personalized price quote, and apply today!