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Applying for a mortgage can be a confusing process, especially as a first-time homebuyer.
It’s important to understand the terminology behind mortgages and payment options before you apply for a loan. That way, you have the knowledge needed to make the best choice for your situation and needs.
Here’s a rundown (in alphabetical order) of mortgage terminology you should know about.
This is a home loan with an interest rate that can change over time. Most adjustable-rate mortgages (ARMs) feature an initial fixed-rate period, typically anywhere from three to 10 years, after which the rate can go up or down as market rates change. Typically, ARMs have a lower starting interest rate than fixed-rate mortgages, and can appeal to homebuyers who plan to move before the fixed period ends.
This is when you make periodic payments of both principal and interest to pay off a debt. With a fully amortizing mortgage, your principal and interest payment amounts will stay the same over the course of the loan.
While not as common, this type of mortgage typically involves making principal and interest payments for a short period of time without fully paying off the loan. Then a larger-than-usual, one-time payment is due at the end of the loan term to pay off the outstanding principal balance. This is a balloon payment.
This is a mortgage that meets or “conforms” to certain guidelines, such as debt-to-income limits and documentation requirements, set forth by Fannie Mae and Freddie Mac (private companies created by the federal government). In 2018, the loan limit for a conforming loan was set to $453,100 for most areas of the country. Mortgage loan amounts over that limit are generally considered jumbo loans.
This is a loan that is not insured or guaranteed by the federal government.
This most popular mortgage type features an interest rate that does not change over the life of the loan. This means the principal and interest portion of your monthly payment won’t fluctuate. However, since homeowners insurance and property tax rates may change, your total monthly payment may still fluctuate slightly.
These are mortgage products insured by the U.S. government — for instance, through the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). Borrowers must meet certain requirements to qualify, but approval guidelines may be more flexible.
Some mortgages allow you to pay only interest each month for a set number of years (usually 10). During the interest-only period, you won’t accrue any equity in your home unless it appreciates in value, and you won’t reduce the outstanding principal balance on your loan. After the interest-only period ends, the lender will increase your mortgage payment to include both principal and interest payments. This results in a significantly higher mortgage payment to ensure you’re able to pay off your principal balance by the end of the loan repayment term.
Any mortgage with a loan size above the current conforming loan limits is considered a jumbo. Jumbo mortgages may have more stringent qualifying requirements, such as a higher credit score and higher down payment.
Picking the right home mortgage is as important as choosing the right home. Our dedicated colleagues can help you find the right financing option for your unique situation. To learn more, visit us online or reach out to a Citizens Bank Loan Officer.
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