It’s no secret that the mortgage process can prove complicated, confusing, or downright intimidating for many buyers. After all, how are you supposed to know the difference between all those acronyms?
The good news is that knowledge is power! This month, we’re walking you through some of the most common mortgage definitions that current and potential owners need to know.
Refresh your memory with Mortgage Definitions You Need to Know: Part 1, and let’s continue studying!
Equity
Home equity is the difference between the value of the home and the remaining loan amount (Investopedia, 2022). Equity increases as a home’s value goes up and the loan amount goes down. This typically occurs when large home improvements are made the home appreciates in value or regular mortgage payments are made over time.
Escrow
Escrow refers to a process in which allocated funds are held by a third party and used to finance required property expenses (Investopedia, 2021). These might include property taxes or insurance. The money is dispersed only when a specific condition is met, such as a borrower closing and taking possession of a property.
Federal Housing Administration (FHA) Loan
The FHA Loan is a program allowing borrowers who may not qualify for conventional loans to obtain a mortgage loan, provided they meet criteria set forth by the Federal Housing Administration, who insures the loans (U.S. Department of Housing and Urban Development). These mortgage loans typically require a smaller down payment than other loan options.
Fixed Rate Mortgage
A fixed rate mortgage is another mortgage loan type with a fixed, or unchanging, interest rate. This means that, unlike an adjustable-rate mortgage, the amount you pay for principal and interest on your mortgage loan will not fluctuate over time.
Freddie Mac/Fannie Mae
Fannie Mae and Freddie Mac aren’t your new neighbors, but you may have a close relationship with them through the life of your home loan (Investopedia, 2021). They are two of the leading government-sponsored enterprises (GSE’s), that are responsible for maintaining reasonable mortgage market stability. Both organizations were created by Congress and help ensure the mortgage market remains liquid and affordable.
Jumbo Mortgage
Jumbo mortgages are home loans for amounts above the conforming loan limits (Investopedia, 2022). These loans are typically used to purchase luxury properties or homes in particularly expensive areas, but in some markets jumbo loans are the average due to home prices. As the name implies, Jumbo mortgages are larger than the conforming mortgage loan, and typically come with higher interest rates, unique underwriting requirements, and their own tax implications.
Don’t let industry jargon and an array of acronyms scare you away from homeownership. After all, with just a bit of studying, you’ll be up to speed in no time!
Published on April 11, 2022
