Buying a home is a significant investment that requires thorough research and understanding. One of the most crucial aspects of the home-buying process is understanding home loan terms. With the number of loan options available to homebuyers, it's easy to become overwhelmed and confused by the different terms and jargon used by lenders.
Failing to comprehend the terms can lead to paying more than necessary or make it difficult to manage your finances. That's why you need to have a basic understanding of the main home loan terms that you're likely to encounter. This glossary will give you a head-start as a homebuyer.
Amortization is the gradual decrease of a loan's balance over time, usually from regular payments. Payments are divided between principal and interest, with more of the payment being applied to interest earlier in the loan's life and more of it going towards the principal near the end.
The principal is the amount borrowed from the lender, usually a fixed sum. So each payment you make reduces the loan balance and pays interest that accrues on the balance. This payment structure helps you pay off your loan over an agreed-upon period, such as a 30-year or 15-year loan.
Annual Percentage Rate (APR)
The APR is the total amount of interest you will pay on a loan over a year. It is calculated by taking into account other costs associated with the loan, such as closing costs and origination fees. This rate also includes any additional charges, such as points, which increase the interest rate on your loan.
The APR can help you compare different loans more accurately than just looking at the interest rate, as it factors in all associated costs. This way, you can quickly zero in on the loan that best fits your budget.
Closing costs are the fees related to closing a loan and generally include origination fees, appraisal fees, title search fees, and more. These fees can vary depending on the lender, loan amount, and type of loan you choose.
These costs are typically paid at the end of the loan closing process and are usually due when the loan is finalized. It's important to factor them into your budget when shopping for a loan. But if you don't have the funds to cover them, you can roll them into your loan balance. Talk to your lender about this option so there isn't an unexpected expense at the end of the loan process.
For more info, contact a local financial institution like Bellco Credit Union.