10 Common Mortgage Related Terms | Terms Every Mortgage Broker Should Know

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November 25, 2014 | By RGR Marketing Blog

How Mortgage Brokers Can Educate Clients

Buying a home can be a stressful event, especially if it’s you or your client’s first time. Chances are strong that a first-time homebuyer will never make a more expensive purchase during the course of their lives. What can be even worse, is the litany of brand new and seemingly opaque mortgage-related terms that will inevitably be thrown their way. For a mortgage broker or financial professional in the real estate business, it can be easy to take such complex terms for granted. After all, it’s the language you speak so well, every day you’re in business.

But for your clients (of if you’re a first-time homebuyer, then we’re talking to you!), that won’t be the case at all. The best mortgage brokers make the process of buying a home, a time for education and reassurance, too. They talk their clients through the process, step by step, and help them get comfortable in a world that may seem all too foreign.

If you’re just shopping around for a house, or you’re a mortgage broker looking for a quick list of terms to make sure you can easily explain to clients, then read on.

Fixed-Rate Mortgage Vs. Adjustable Rate Mortgage

When it comes to financing a home purchase, there are two basic categories: fixed-rate mortgages, and adjustable-rate mortgages, which are typically referred to as ARMs. Of course, it’s not that simple, as once you start to break down each of these two categories, there are several variations of each. But a larger truth is more important to remember: how standardized your monthly payments will be, and how low those payments will be, are all directly tied to the type of mortgage you get. With an ARM, your home loan’s interest rate will change from time to time, based on a standard financial index. To avoid the interest rate going through the roof, there is often a cap on how high it can go. A fixed-rate mortgage is exactly the opposite: your interest rate is locked in for the life of the loan.

What Exactly Are Closing Costs?

Closing costs represent all of the expenses that are involved with the transferring of the ownership of property, which in this case, is the home. These expenses aren’t limited to the buyer, either – closing costs encompass all expenses, whether on the part of the buyer or the seller. This may include fees for origination or a lawyer, escrow payments, title insurance, taxes, and more.

Tell Me Exactly What a Down Payment Is

The amount of money that the buyer puts down on the house they are buying is the down payment – and it’s a crucial number. First, because most lenders will require a buyer to put down at least a minimum of the total purchase price. That number can be as low as five percent, and as high as twenty percent, in many cases. No-money-down mortgages, after all, were part of what happened in the financial crisis back in 2008. And second, the down payment is important because homebuyers will often be able to lower their monthly mortgage payments by borrowing less, and putting more money into their down payment. This is why many people end up borrowing money from family members, in order to put more money down. Last, if you end up putting less than twenty percent of the purchase price into the down payment, you will likely have to get private mortgage insurance, too.

What’s an Appraisal?

An appraisal of the home’s value should always be conducted by an industry professional, whose job it is to make sure that the buyer’s asking price is actually how much the home is worth. The value of the property, as determined by the appraisal, can impact how much money the lender is willing to let a homebuyer borrow. This expert opinion is both certified and state-licensed by the professional conducting the appraisal.

What Is Homeowners Insurance?

Homebuyers will be required to purchase what’s known as a homeowners insurance policy, which is there to offer protection against potential disasters. Most homeowners insurance protects both the home, as well as the possessions that are kept within its walls. And further, not only does the policy typically cover damage that may occur to the property, but it also covers a homeowner’s liability for any injuries that may be caused to other people, including pets kept on the property. It is important to note that protection from natural disasters such as earthquakes and floods – separate policies for these occurrences must be obtained by the homeowner.

Why Do I Need Title Insurance?

At some point in the process, the issue of title insurance will arise, and here’s why it’s necessary. Title insurance provides a guarantee to the homebuyer that the owner (or seller) actually has title to the property, and therefore is legally able to transfer that title to the buyer (or anyone else, for that matter). For homebuyers, there’s really no way to tell if the seller owns the property – other than to accept them at their word. Title insurance provides proof that the seller can really sell the property.

What Is PMI?

PMI, or Private Mortgage Insurance, is an additional insurance policy that is required of borrowers who put less than 20% of the purchase price down on their home at the time of buying. The policy is there to protect the mortgage lender from a homebuyer with less cash in hand, from defaulting on the loan, offering lenders a way to get back some lost money in the event of a foreclosure. More often than not, the cost of a PMI policy is spread out as part of the total monthly payment, and will typically be canceled once the buyer has built up at least 20% equity in the home.

Jumbo Mortgage Vs. an Interest-Only Mortgage

As mentioned earlier, there are several variations to each category of mortgage, whether you’re dealing with an ARM or a fixed-rate mortgage. A Jumbo Mortgage is any home loan whose amount exceeds conforming loan limits (these are set by the government-sponsored agencies that buy mortgages from lenders, Fannie Mae and Freddie Mac). Across most parts of the U.S., the limit is set at $417,000.

An interest-only mortgage is a type of adjustable-rate mortgage that gives homebuyers a break at the beginning of their mortgage term, by allowing them to only pay the interest on the loan, thereby lowering the monthly payments. Interest-only mortgages have a downside, though, and they can be risky. If a homebuyer knows that they only need the loan for a very short amount of time, because they plan to sell the property before the interest-only period comes to an end, then this type of mortgage can be beneficial. However, if the value of the home declines during that time, these types of mortgages can be difficult to impossible to refinance.

[Photo Credit: Rhino Funding]

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How Mortgage Brokers Can Educate Clients

Fixed-Rate Mortgage Vs. Adjustable Rate Mortgage

What Exactly Are Closing Costs?

Tell Me Exactly What a Down Payment Is

What’s an Appraisal?

What Is Homeowners Insurance?

Why Do I Need Title Insurance?

What Is PMI?

Jumbo Mortgage Vs. an Interest-Only Mortgage

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money today!

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How Mortgage Brokers Can Educate Clients

Fixed-Rate Mortgage Vs. Adjustable Rate Mortgage

What Exactly Are Closing Costs?

Tell Me Exactly What a Down Payment Is

What’s an Appraisal?

What Is Homeowners Insurance?

Why Do I Need Title Insurance?

What Is PMI?

Jumbo Mortgage Vs. an Interest-Only Mortgage

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