Decoding Terms For Columbia Home Buyers

 

When you are hanging out with friends and some seem to have their own secret

language, it can feel exclusionary. The same can happen when you are buying a home

and encounter unfamiliar mortgage terminology. Let us help you navigate the ins and

outs of mortgage lingo.

 

ARM

 

An adjustable-rate mortgage (ARM) has interest rates that change based on market

conditions. Initially, the fixed interest rate is usually lower than a fixed-rate mortgage.

However, this fixed rate expires after a certain period and is then influenced by the

market—this can be good or bad depending on the economy.

 

PMI

 

If you are buying a home with less than 20% down, you will become familiar with PMI

(Private Mortgage Insurance). PMI protects the lender if you default on the loan and is

typically included in your monthly mortgage payment. It is important to note that PMI

protects the lender, not you.

 

APR

 

The Annual Percentage Rate (APR) is the annual rate charged for borrowing money.

Unlike the interest rate, APR includes the nominal interest rate plus any other costs or

fees associated with the loan (like closing costs and lender fees). Therefore, the interest

rate is usually lower than the APR.

 

Discount Points

 

You can prepay interest on your loan by purchasing discount points. Each point costs

about 1% of the total loan amount and typically lowers the interest rate by ⅛ to ¼ of a

percent. Discount points are tax-deductible, providing long-term benefits by lowering

your monthly mortgage payment.

 

Amortization

 

Your amortization schedule outlines your loan repayment plan. Initially, most of your

monthly payment goes toward interest, but this decreases each month as you pay down

the loan.

 

Escrow

 

An escrow account holds money set aside by the borrower to pay for monthly real

estate taxes and homeowners’ insurance. Lenders usually require borrowers to set

aside several months of these taxes and a year’s worth of insurance payments in an

escrow account.

 

Title Insurance

 

Title insurance ensures you have ownership of your property. It protects you from

unexpected claims on the property, like unpaid property taxes from previous owners.

Most lenders require title insurance, but it is wise to purchase an owner’s policy as well,

covering the outstanding loan amount at the time of the claim.