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Mortgage Basics and Some Associated Terms

A mortgage is generally a loan issued to a homebuyer that pays the purchase price of the home, in addition to property taxes and insurance premiums on behalf of the buyer. Here are common mortgage types:

Adjustable Rate Mortgage (ARM): An ARM is just what it sounds like. It is a loan with an adjustable interest rate. This interest rate is determined at a given point by the index rate. This type of mortgage causes the payments to ebb and flow so it won't work for homeowners who need a fixed payment.

Fixed Rate Mortgage (FRM): An FRM is a mortgage with an interest rate determined upon the acceptance of the loan application and locked in for the duration of loan period. This is the traditional mortgage that our parents used, and it is typically the most commonly refinanced type of mortgage loan.

Balloon Mortgage: This is usually a fixed rate mortgage requiring smaller payments at the beginning of the loan and a lump sum payment or refinance being required after a certain time period. Loan terms are usually shorter with this type of lending.

Convertible Adjustable-Rate Mortgage: With this type of home loan, a buyer gets the option to review current interest rates at an agreed upon time, and to change their mortgage from an ARM to a FRM. A small closing cost may be required upon changing the loan.

Construction Mortgage: A construction mortgage is used for the purchase of home building plans and the construction of that home by a builder or contractor(s). Almost entirely similar to an ARM or an FRM upon completion of the home building plan purchase and construction, a construction mortgage functions more like a line of credit than a loan. Benefits include interest accruing only after disbursement and the ability to pay the loan off in entirety upon completion of the construction if the buyer prefers.

Cash-out Refinance Loan: This is when the homeowner refinances their home for more than the amount that is owed on the original mortgage. The homeowner then receives the balance after the original mortgage is paid in full. This is frequently useful for home improvements or paying for educational expenses.

100% Financing: This means that no down payment on the loan at the closing. This may still mean that the buyer has some costs at closing however. Your financing company can provide you with an estimate of expected costs.

Closing (Settlement) Costs: Typically, closing costs will include a loan origination fee, and appraisal fee, a title search fee, a credit reporting fee, a deed record fee and any discount points agreed upon by the home buyer and the lender. Expect closing costs to range between 2-7% of the value of the home being purchased.

Amortization: Equal payments over a fixed time period used to repay a loan. This includes the interest tat accrues from the time of closing.

Annual percentage rate (APR): Interest rate that affects the true overall cost of a mortgage. This is given as a yearly rate, and is generally the rate advertised by the lender as the yearly interest rate. The APR is the way that homeowners compare offer packages given by various lenders.

Still have questions?  Check out a more extensive list of terms related to home mortages!

This home building article by:
Michelle McClory with AmazingPlans.com