Updated: Mar 14, 2019
Shopping for your first home? If so, prepare for the baffling alphabet soup of acronyms you’re about to encounter. FHA, MLS, ARM, API … the list goes on and on. Housing finance is extraordinarily complex, and unless you’re in the banking industry, it’s easy to feel intimidated by all the jargon.
Don’t be! A good way to get an overview of the system is to consult a comprehensive glossary of mortgage finance terms.
Here are just a few of common terms you’re likely to run into:
Multiple Listing Service/MLS – This is a database of all current homes for sale. Only licensed real estate agents have access to the MLS, which is one of the many reasons every home buyer needs to work with an agent.
Credit Score / FICO – Do you know yours? If you don’t, you’re about to, because it’s one of the first things that everyone’s going to want to know about you. Credit scores can run from a low of 300 to a high of 850. In general for mortgages, you should have a 620 or better. If you’ve never had a loan or credit card, then you might not even have a credit score, and in that case, you could find it extremely hard to qualify. Start building a credit history right away.
FHA – The Federal Housing Administration’s objective is to help stimulate the housing market by making home loans affordable and accessible. FHA Loans are part of a government insured mortgage program, designed especially for first-time home buyers. It offers 30-year fixed interest rates, low down payments and low minimum credit scores (into the 500s, in some cases). In exchange for these favorable terms, borrowers will most likely be required to buy private mortgage insurance, also known as PMI. The PMI will be tacked on to your monthly mortgage bill. Other government insured mortgage loan programs that are good for lower income of first time buyers are VA Loans and USDA Loans. These programs, and FHA, have a cap on the amount you can borrow.
Conventional Loan Programs – Not to be confused with FHA or other government insured loan programs, here is where you will start hearing about Fannie Mae and Freddie Mac programs. While Fannie and Freddie are government agencies, they don’t insure loans – they bundle them into securities for investors. Interest rates may be higher, and repayment terms may be shorter than 30-years, but you can get a higher loan amount for that luxury condo you have your heart set on.
Adjustable Rate Mortgage / ARM – This is a mortgage structured so the interest rate adjusts over time, usually in conjunction with changes in the prime interest rate. ARMs are a good option if you need a higher loan with little money down, but that carries risks. Just know that your monthly mortgage payment might rise over time. For example, a 5/1 ARM has a set interest rate for the first 5 years and could then adjust each year afterward. A 5/3 ARM has a fixed rate for 5 years and then could adjust once every subsequent 3 years. Many ARM types exist. Frequently, borrowers will refinance ARMs at some point before the loan adjusts or during the first adjustment period if interest rates are rising. Fixed rate mortgages are generally considered to be less risky for residential real estate buyers, but ARMs work well if you plan to sell within the fixed-period of the loan.
Annual Percentage Rate / APR – The interest rate you actually pay on your home loan, versus the interest rate the bank quoted you in your application documents. The APR is usually a little higher. That’s because if you are like most home buyers, you will include the bank fees, points, loan origination fees, etc. in your total loan package. These can run into the thousands of dollars. Many buyers finance them as part of the loan, but they do have to pay a slightly higher rate to do so. Find out what this is in advance, so you won’t be surprised at closing.
The more you hear these terms, the more you will understand them and be less intimidated by the vocabulary of real estate finance. And while this list is by no means complete, it’s a great starting point for you to have intelligent conversations about the subject.
At NextHome Titletown, we understand real estate finance and can walk you through all of these options. If you need help understanding real estate finance and which programs you should pursue for your real estate purchase, please drop us a line at NextHome Titletown. We’re available at 617.657.9811 or firstname.lastname@example.org.