Help for first-time homebuyers with financing terminology
Question: We are buying our first home and are very confused about the financing terminology. Could you give us some help?
Answer: First-time homebuyers might find financing terminology to be very confusing. One of the most important elements of mortgage finance for borrowers to understand is the interest rate, which is the number that is multiplied by the loan balance to calculate the interest payment owed to the lender. Although the rate quoted on a mortgage is an annual rate, it is applied monthly.
With a fixed-rate mortgage, the interest rate is set for the lifetime of the loan. On an adjustable-rate mortgage (ARM), however, the rate is set for an initial period of one month to 10 years, after which it may change. ARM borrowers have some special considerations when shopping for a mortgage. The fully indexed rate for ARMs, equivalent to the sum of the interest rate index used by the ARM and the fixed margin of profit added on by the lender, tells lenders where the rate will go in a stable interest rate environment. Should interest rates suddenly jump, meanwhile, the maximum rate limits how high the ARM percentage can rise. The second component in the price of a mortgage is points. Each of these upfront fees is expressed as one percent of the loan amount. Points are paid in exchange for a discount on the interest rate. Conversely, rebates are points paid by the lender for high-rate loans and then used by the borrower to, perhaps, offset the costs of settlement.
Finally, mortgage borrowers should recognize that origination fees are imposed by lenders to disguise higher rates. For borrowers, points and origination fees are essentially the same--except that points are tax deductible and origination fees are not. "Junk fees" is a term used to describe any of a bevy of other upfront charges, expressed as a dollar amount of the loan, levied by the lender or mortgage broker.
For answers to your real estate questions, call Allison at 970-468-6800 or 1-800-262-8442