Getting Your First Mortgage? Be Sure To Know The Following Terminology
If you are getting your first mortgage, you are likely going to hear about a ton of different terms that you are not familiar with. You'll be set up much better for success if you know what the following terms mean.
Underwriting
Your mortgage lender will likely tell you at some point that your loan is in underwriting, but the term does not even hint at what it really means. The underwriting process means that your loan is being reviewed by another person to decide if you will be approved for the loan or it will be denied. While there are many factors that go into the underwriting process, many of them are out of your control, so you just need to wait the process out.
Escrow
Have you been told that you will need an escrow account for your mortgage? This may be a requirement when your lender wants you to pay for your mortgage and property taxes in advance, rather than having you be responsible for paying the taxes on your own. This means that you'll have to put money into an escrow account to cover the upcoming bills, which is much like a savings account where the money sits until it is needed to make a payment. Your lender may let you know when the account needs to be funded, or you can even set up automatic transfers to fund the account each month. Either way, your lender wants to ensure that you are able to pay the big tax bill when it comes.
Amortization Schedule
Paying interest on a mortgage is a bit different than paying it on a credit card. Rather than being charged a flat percentage interest rate across the entire length of the loan, a mortgage has an amortization schedule where the amount of interest that you pay varies. If you have a mortgage at an interest rate of 3.0% on a 30-year loan, that means that the interest averages out to 3% over the entire 30 years. However, the first half of the mortgage will have each payment being more interest than principal, and the latter half will be more principal than interest. The amortization schedule spells out exactly how much goes towards interest and principal for each payment so that you know how much equity you are building in your home.
Reach out to your mortgage lender if you have questions about other terms you are not familiar with.