Common Mortgage Terms
The mortgage industry has a set of terms that may be unfamiliar to you.  Learn the terms here to better understand your home loan options.

Term
You will hear of 15 vs 30 year loans.  This is called the ‘term’ and signifies the number of years that the loan will be paid over.  There are other terms available as well such as 10 or 20 years, they just are not as common.
In general the shorter the term, the lower the interest rate. Therefore a big benefit of shorter term mortgages is the money you save.
If you cut a very conservative quarter of a percent off for reducing the lenders exposure by 15 years, your savings will be nearly 26%.

Fixed Rate
Fixed rate mortgages have the same interest rates over the entire life of the mortgage.

Adjustable Rate Mortgages (ARM )

ARM’s are mortgages whose rates adjust over the life of the mortgage.  How often and how much the rate is allowed to adjust is spelled out in the contract so read it carefully.  The initial rate is normally lower than the Fixed Rates available, but consumers should always consider the worst case scenario in the adjustments of the loan to determine if they can afford the ARM.

Balloon Mortgage
A balloon mortgage is one that requires a large payment of cash at the end of its term.  This type of mortgage allows borrowers either to afford more house then they otherwise could buy or its reduces their monthly costs, allowing them to spend or invest their savings elsewhere.  For example, you might obtain a 15 year fixed rate mortgage that allows you to pay less than the normal amortization schedule would call for. At the end of the 15 years, you will still owe a portion of the principal. How much depends on the terms of the contract.  An interest only mortgage is an example of this type of loan. In the case of an interest only loan, the balloon will be the full amount you originally borrowed.

BiWeekly Mortgages
A biweekly mortgage is one where pay half of the normal mortgage payments every two weeks. This results in making 26 payments a year, rather than 24, so you wind up paying off the mortgage sooner and saving considerable interest.

In the example of a 30 year term, the loan will be paid 5 1/2 years earlier and you will save 28% of interest.

As long as your loan does not have any prepayment penalties, you can set up your own biweekly mortgage plan with your existing mortgage.

Bridge Loans
Bridge loans are used in real estate transactions to cover the down payment on a new home, when the borrower has equity in his old home, but not enough cash.

It is generally a short term, interest only loan that is repaid when the homeowner sells his old house.

FHA (Federal Housing Administration)
The FHA is a governmental agency which is a branch of the Housing and Urban Development (HUD) Department.  This type of mortgage is designed to help low and moderate income people become home owners. It requires low down payments and has flexible lending requirements.  If the borrower defaults on the loan, the government steps in and pays the guarantee.

Home Equity Line of Credit
A revolving credit line secured by your home.  It generally offers a lower rate than other consumer credit and is tax deductible.  It is frequently used as a debt consolidation tool.  It differs from a second mortgage in that it is not for a fixed term or amount and can be kept in effect as long as you own your home.

Jumbo Mortgage
This is simply a mortgage over a certain amount.  The amount is adjusted occasionally, and generally the interest is slightly higher than for smaller loans.

Filed under: Rochester MN mortgages

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