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APR, ARM, O-M-G! 10 Mortgage Terms You Need to Know

APR, ARM, O-M-G! 10 Mortgage Terms You Need to Know

Now that we’re all done gazing at the solar eclipse and some of us have sent our little students back to class, it is time for us to hit the books and learn a bit about everyone’s favorite topic… mortgages!

If you’re paying a mortgage each month, it is likely one of your largest expenses. If you’re interested in buying a home, it may be one of your biggest stressors. If you’re looking to sell your home, you may know more about your mortgage than you ever thought you might. Once you enter the realms of homeownership, a mortgage typically becomes a major part of your life.

So, what do you need to know about a mortgage? Here are 10 terms to get familiar with:

Debt-to-Income Ratio: Before you become the proud owner of a new home (and a new mortgage), lenders will consider your debt-to-income ratio. This is a calculation of your monthly debts and regular expenses versus your gross income. Lenders use this figure to determine whether or not you will be approved for a loan and what kind of APR they may offer you.

APR: Your APR, or annual percentage rate, is the amount of interest you pay on your mortgage. Unless you refinance, it sticks with you for the entire length of your mortgage. So, the lower this number is, the better!

Refinance: Not sure what this term meant when you read it? Refinancing your home means that you’re replacing one mortgage with another. Many people choose to refinance their homes to lower their APR (see above).

Fixed-Rate: Since we’ve already discussed swapping one mortgage for another, we ought to explain a few different types! A fixed-rate mortgage is a conventional type of mortgage that acts much like it sounds. In a fixed-rate mortgage, your APR stays the same until your loan is paid in full. Once you and your lender set an APR, it is going to stick!

ARM: An ARM, or adjustable rate mortgage, is a type of home loan where your APR adjusts on a scheduled basis. You may start out with a certain APR, but you should know that it could change (for better or for worse!) on a monthly or yearly basis. Each ARM is different, so talk to your preferred lender about specific mortgage terms.

FHA: An FHA loan is another type of conventional loan with a fixed rate. This borrowing option is backed by the Federal Housing Administration and often allows buyers to qualify for a mortgage more easily than other home loans. A lower down payment and PMI are two typical characteristics of an FHA loan.

Down Payment: This is a lump sum of money that a buyer pays toward the price of their home. Lenders often require that anywhere between 5%-20% of a home’s price is paid up front. Once that down payment is met, the rest of the loan is paid in monthly installments over the course of the mortgage.

PMI: If a lender requires less than 20% for a down payment on a conventional home loan, they may also require that a borrower pay PMI, or private mortgage insurance, until they’ve paid off 20% of their mortgage. This is a monthly fee that protects a lender in case a borrower fails to meet their mortgage terms at any point.

Foreclosure: Speaking of not meeting mortgage terms, once a borrower fails to pay on their home loan, they may be forced into foreclosure. This is a term that no homeowner wants to get familiar with, but it is a reality if you are unable to repay your mortgage. During a foreclosure, your lender sells your property to recoup whatever they can on their investment.

Short Sale: Another option for lenders when a buyer fails to repay their mortgage is a short sale. This is when a home is sold for less than the remaining balance of the mortgage. The bank that owns the mortgage will not recoup their entire investment, but they will settle for settle for less, so they are not facing a total loss.

These 10 terms are a great start when it comes to mortgages, but you can learn even more here.

This post is sponsored by PA Preferred Mortgage:

Pennsylvania Preferred Mortgage is a full service mortgage banker and is a member of the Prosperity Home Mortgage, LLC family. Specializing in residential and refinance loans, Pennsylvania Preferred Mortgage offers a wide range of mortgage products, including fixed and adjustable rate mortgages, jumbo loans, Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, and renovation financing. Learn more at www.papreferredmortgage.com.