Lenders, like many professions, have their own
unique terms and acronyms that are used
regularly. It is easy to forget that home buyers
are not familiar with these terms that realtors
use daily in the home buying process. The most
confusing part of buying a home is the mortgage
process and the many confusing words used.
Here are some of the more common terms and
what they mean.
Conventional loan - The most typical loan. This type of loan is best suited for home buyers with
good credit and a 20 percent down payment. New rules from Fannie Mae and Freddie Mac allow for
down payments as low as 3 percent.
FHA loans - These loans are good for first time home buyers. They are also good for those with less
than pristine credit, typically less than a 650 credit score. These loans can require a down payment as
low as 3 percent.
Fixed-rate mortgage - These mortgages feature interest rates that will not change over the life of the
loan. If a home buyer gets a 4 percent interest rate on their loan today, the interest rate they pay for
the next 30 years will be 4 percent.
interest rate is locked for a predetermined amount of time (five years for example) and then the
interest rate will rise and fall with a selected index (often the prime rate). These mortgages are
attractive for the initial interest rate that is typically less than a fixed-rate mortgage. Adjustable rate
mortgages are often referred to as ARMs.
Private mortgage insurance - If a home buyer has less than 20 percent for a down payment, lenders
require private mortgage insurance. The private mortgage insurance fee is tacked on to your monthly
mortgage payment. This fee can range from .03 percent to 1.15 percent of the loan amount divided by
12. The fee can go away after the homebuyer has 20 percent equity in their home. These are general
guidelines and home buyers should check with their lender for the exact terms of their private
mortgage insurance. Private mortgage insurance is often referred to as PMI.
Points - Points are prepaid interest. Homebuyers can prepay interest on their loan in order to lower
their monthly mortgage payment. Points often make sense if the homebuyer plans on staying in the
home for a long time. One point is equal to one percent of the loan amount. For example, one point
on a $150,000 loan is $1,500.
Closing cost – These are the costs associated with the purchase of a home. They are paid when the
home is legally transferred from the seller to the buyer, also known as the closing. These costs can
include lender fees, points, title insurance, pre-paid taxes and interest, appraisals, survey fees and
more. These costs can run between two and five percent of the home purchase price.
Prequalified/ pre-approved - These terms refer to a home buyer’s status with their lender.
Prequalified is a general term that means with very little documentation a lender has determined that
a homebuyer qualifies to purchase a home in a certain price range. Pre-approved means that a lender
has stated that the home buyer can borrow the amount needed to purchase the home they want as long
as there are no drastic changes in the homebuyer’s life (job loss, missed payment). This requires
much more documentation and time. Pre-approval is usually not sought until the home buyer is truly
ready to buy.
I hope that knowledge of these terms will make the home buying process a little less intimidating.
Rick is a realtor, real estate author, and a long time Windham resident. Rick can be reached with all of
your real estate questions and needs at email@example.com.