Navigating the mortgage process can feel like learning a completely new language. Between adjustable-rate mortgages, amortization schedules, and annual percentage rates, you might find yourself scratching your head more than nodding along. That's perfectly normal—mortgage lending comes with its own vocabulary, and understanding these terms makes a real difference when you're making one of the biggest financial decisions of your life.
This comprehensive guide breaks down the mortgage terminology you'll encounter throughout your home buying journey, from your first preapproval to your final closing documents. Whether you're a first-time buyer or refinancing your existing home, having a solid grasp on these concepts helps you ask better questions, compare offers more effectively, and ultimately make more confident decisions about your financing.
According to the Federal Housing Finance Agency (FHFA), the baseline conforming loan limit is $806,500 for one-unit properties in most of the United States—a 5.2% increase from the 2024 limit of $766,550. This adjustment reflects the year-over-year increase in average U.S. home values between the third quarters of 2023 and 2024.
For high-cost areas where median home values exceed 115% of the baseline limit, the ceiling reaches $1,209,750, representing 150% of the baseline limit. These elevated limits apply to counties in states like California, Hawaii, parts of Colorado and Florida, and major metropolitan areas along the East Coast. Special provisions also establish the baseline loan limit at $1,209,750 for properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
One-unit property: $806,500
Two-unit property: $1,032,750
Three-unit property: $1,248,425
Four-unit property: $1,550,875
These conforming limits matter because loans within these boundaries typically qualify for purchase by Fannie Mae and Freddie Mac, which generally means more competitive interest rates and broader availability of financing options. At AmeriSave, we work with conforming loans that meet these standards, helping you access competitive rates and favorable terms.
When your loan amount exceeds the conforming limits for your area, you'll need a jumbo loan or non-conforming loan. Jumbo loans typically require stronger credit profiles, larger down payments of 10-20% or more, and come with slightly higher interest rates to compensate lenders for the increased risk they're taking on.
Let's look at a practical example: Suppose you're buying a home in a standard-cost area for $950,000 with 10% down. Your loan amount would be $855,000 ($950,000 × 0.90 = $855,000).
Since this exceeds the $806,500 conforming limit, you'd need a jumbo loan. Alternatively, some borrowers use a "piggyback" structure with a first mortgage at the conforming limit ($806,500) and a second mortgage or home equity loan for the remaining $48,500.
The principal is the actual amount you're borrowing from the lender before interest and fees. If you're purchasing a $400,000 home with a 20% down payment, you'd pay $80,000 upfront ($400,000 × 0.20 = $80,000), and your principal loan amount would be $320,000.
Understanding your principal matters because it's the foundation for calculating interest. Each monthly payment you make includes both principal and interest, with the balance between the two shifting over the life of your loan through a process called amortization.
The interest rate and annual percentage rate (APR) might look similar, but they tell you different things about what your loan actually costs.
Your interest rate is the percentage you'll pay annually to borrow the money, applied only to your principal balance. If you have a $300,000 loan at 6.5% interest, you'll pay approximately $19,500 in interest during the first year ($300,000 × 0.065 = $19,500), though your actual monthly interest depends on your remaining balance.
The annual percentage rate provides a more complete picture by including your interest rate plus most upfront costs like origination fees, discount points, mortgage insurance premiums, and certain closing costs. According to the Consumer Financial Protection Bureau (CFPB), lenders must disclose APR to help borrowers compare the true cost of different loan offers.
Here's a real-world comparison: Lender A offers 6.5% interest with $3,000 in fees, while Lender B offers 6.25% interest with $8,000 in fees. The APR calculation accounts for both the rate and fees spread over the loan term, making it easier to see which deal actually costs less over time. At AmeriSave, we provide clear APR disclosures upfront so you can make accurate comparisons when shopping for your mortgage.
A fixed-rate mortgage maintains the same interest rate throughout the entire loan term—whether that's 15, 20, or 30 years. Your principal and interest payment stays constant, making budgeting straightforward. If you lock in a 6.0% rate on a 30-year fixed mortgage, you'll pay that same 6.0% in year one and year twenty-nine.
An adjustable-rate mortgage starts with a fixed rate for an initial period, then adjusts periodically based on market conditions. Common ARM structures include:
5/1 ARM: Fixed for 5 years, then adjusts annually
7/6 ARM: Fixed for 7 years, then adjusts every 6 months
10/1 ARM: Fixed for 10 years, then adjusts annually
ARMs include rate caps that limit how much your interest rate can change. For example, a typical ARM might have a 2/2/5 cap structure, meaning the rate can't increase more than 2% at the first adjustment, 2% at each subsequent adjustment, and 5% total over the life of the loan. If your initial rate is 5.0%, the lifetime cap means your rate could never exceed 10.0%.
Our team at AmeriSave can help you evaluate whether a fixed-rate or adjustable-rate mortgage makes more sense for your timeline and financial goals.
Discount points let you pay money upfront to reduce your interest rate. One point equals 1% of your loan amount. On a $350,000 loan, one point costs $3,500 ($350,000 × 0.01 = $3,500). Each point typically reduces your rate by 0.25%, though the exact reduction varies by lender and market conditions.
To determine if buying points makes sense, calculate your break-even point. If you pay $7,000 for two points that save you $75 monthly, you'll break even after approximately 93 months ($7,000 ÷ $75 = 93.3 months). If you plan to keep the mortgage longer than that, the points save you money. If you'll refinance or sell sooner, skip the points.
An origination fee typically ranges from 0.5% to 1% of the loan amount and covers the lender's administrative costs for processing your application. Unlike discount points, origination fees don't reduce your interest rate—they simply compensate the lender for their work.
Amortization describes how your loan balance decreases over time through regular payments that cover both interest and principal. According to Freddie Mac's home buying glossary, during the earlier years of a loan, most of each payment applies toward interest. During the final years, payments apply almost exclusively to principal.
Here's how this works with numbers: Consider a $300,000 loan at 6.5% interest on a 30-year fixed mortgage. Your monthly payment for principal and interest would be approximately $1,896.
Month 1: Interest = $1,625 ($300,000 × 0.065 ÷ 12), Principal = $271
Month 60: Interest = $1,542, Principal = $354
Month 180: Interest = $1,187, Principal = $709
Month 360: Interest = $10, Principal = $1,886
Notice how the interest portion drops while the principal portion climbs? That's amortization in action. An amortization schedule breaks down every single payment over your entire loan term, showing you exactly how much goes to interest versus principal each month. When you work with AmeriSave, we provide detailed amortization schedules so you understand exactly how your payments build equity over time.
Your monthly mortgage payment typically includes more than just principal and interest. PITI represents the full housing payment most homeowners make:
Principal: The portion reducing your loan balance
Interest: The cost of borrowing the money
Taxes: Property taxes collected monthly and held in escrow
Insurance: Homeowners insurance premiums, also escrowed
For example, on a $350,000 home with a $280,000 loan at 6.75% interest, your PITI might look like this:
Principal and Interest: $1,816/month
Property Taxes: $292/month ($3,500 annual ÷ 12)
Homeowners Insurance: $125/month ($1,500 annual ÷ 12)
Total PITI: $2,233/month
If you put down less than 20%, you'll also pay mortgage insurance, creating a PITIM payment. This complete picture helps you understand your true monthly housing cost, not just the principal and interest component.
An escrow account is where your lender holds funds to pay your property taxes and insurance premiums on your behalf. Each month, you pay 1/12 of your annual tax and insurance costs along with your principal and interest. When your tax bill or insurance premium comes due, the lender pays it directly from the escrow account.
Lenders typically require an escrow account for loans with less than 20% down payment. They may also require an initial escrow deposit at closing, usually equivalent to 2-3 months of taxes and insurance, to ensure the account maintains an adequate cushion throughout the year. AmeriSave manages escrow accounts efficiently, ensuring your property taxes and insurance premiums are paid on time without you having to worry about tracking due dates.
Your debt-to-income ratio compares your monthly debt payments to your gross monthly income. Lenders use two DTI calculations:
Front-end DTI (housing ratio) = Monthly housing payment (PITI) ÷ Gross monthly income
Back-end DTI (total debt ratio) = All monthly debt payments ÷ Gross monthly income
Let's calculate both ratios for someone earning $7,000 gross monthly income:
PITI payment: $2,100
Car payment: $400
Student loan payment: $250
Credit card minimum: $150
According to the Consumer Financial Protection Bureau's Ability-to-Repay rule, most qualified mortgages require a back-end DTI of 43% or less, though some loan programs accept higher ratios with compensating factors like larger down payments or substantial cash reserves.
The loan-to-value ratio compares your loan amount to the property's appraised value or purchase price, whichever is lower. LTV directly affects whether you'll pay mortgage insurance and what interest rate you'll receive.
If you're buying a home appraised at $400,000 with a $320,000 loan: LTV = $320,000 ÷ $400,000 = 0.80 or 80%
Most conventional loans require private mortgage insurance when LTV exceeds 80%. The lower your LTV, the less risk the lender takes on, which often translates to better interest rates and terms. A 60% LTV signals significantly lower risk than a 95% LTV.
Your credit score measures your creditworthiness based on your credit history. The most widely used scoring model in mortgage lending is the FICO score, developed by Fair, Isaac and Company. FICO scores range from 300 to 850, with higher scores representing lower credit risk and typically qualifying for better loan terms.
Most conventional loans require minimum FICO scores of 620, though you'll get the best rates with scores of 740 or higher. FHA loans accept scores as low as 580 with 3.5% down, or 500 with 10% down. According to the Mortgage Bankers Association, borrowers with higher credit scores save thousands of dollars in interest over the life of their loans compared to those with lower scores.
Federal Housing Administration loans are insured by the U.S. Department of Housing and Urban Development (HUD) and designed to help first-time buyers and those with modest credit or income qualify for homeownership.
Floor for low-cost areas: $524,225 for single-family homes
Ceiling for high-cost areas: $1,209,750 for single-family homes
FHA loans allow down payments as low as 3.5% for borrowers with credit scores of 580 or higher. The trade-off is mandatory mortgage insurance: an upfront mortgage insurance premium of 1.75% of the loan amount, plus annual mortgage insurance premiums that continue for the life of the loan if you put down less than 10%.
On a $300,000 FHA loan, your upfront premium would be $5,250 ($300,000 × 0.0175 = $5,250), typically rolled into your loan amount. Your annual MIP might be 0.55% ($1,650 annually or $137.50 monthly), depending on your loan term and LTV ratio. At AmeriSave, we specialize in FHA loans and can help you understand whether this program fits your financial situation.
The U.S. Department of Veterans Affairs guarantees VA loans for eligible active-duty service members, veterans, and surviving spouses. These loans offer generous benefits including no down payment requirement, no mortgage insurance, and competitive interest rates.
According to the Blue Water Navy Vietnam Veterans Act of 2019, VA loans no longer have maximum loan limits for borrowers with full entitlement. However, lenders may impose their own limits based on their risk assessment. Borrowers with partial entitlement face limits aligned with conforming loan limits—$806,500 for most areas.
VA loans charge a one-time funding fee instead of mortgage insurance. This fee ranges from 1.25% to 3.3% of the loan amount depending on your down payment, whether it's your first VA loan, and your service category. Veterans receiving VA disability compensation are exempt from the funding fee. Our team at AmeriSave honors those who've served by making the VA loan process as smooth and straightforward as possible.
The U.S. Department of Agriculture offers USDA loans to promote homeownership in eligible rural and suburban areas. These loans require no down payment and feature competitive interest rates for low- to moderate-income borrowers.
Unlike other loan programs, USDA loans don't have a maximum loan amount—instead, eligibility depends on the borrower's income and the property's location. The USDA defines income limits based on the area median income, generally capping household income at 115% of the area median for most counties. Properties must be located in USDA-eligible rural areas, though many suburban communities qualify.
USDA loans charge an upfront guarantee fee of 1% of the loan amount plus an annual fee of 0.35% of the remaining balance. On a $250,000 USDA loan, you'd pay $2,500 upfront ($250,000 × 0.01) plus approximately $72 monthly ($250,000 × 0.0035 ÷ 12) in ongoing annual fees.
Within three business days of submitting your mortgage application, lenders must provide a Loan Estimate—a standardized three-page form that breaks down your loan terms, projected payments, and estimated closing costs. According to CFPB regulations, this document helps you understand and compare offers from different lenders.
Loan amount, interest rate, and monthly payment
Estimated closing costs broken into categories
How your rate and payment may change over time
Total amount you'll pay over the loan's life
How much your payments will reduce the loan balance
Review your Loan Estimate carefully. Compare the APR across different lenders (not just the interest rate), examine the closing cost breakdown, and verify that the loan type, term, and amount match what you discussed. When you apply with AmeriSave, we provide clear, transparent Loan Estimates and are available to answer questions about every line item.
At least three business days before your closing, you'll receive a Closing Disclosure—a five-page form providing final details about your mortgage. This document must match your Loan Estimate closely, with only limited changes permitted. The CFPB requires this three-day waiting period to give you time to review the final terms and ensure no unexpected changes occurred.
Compare your Closing Disclosure to your Loan Estimate line by line. Look for significant changes in:
Interest rate: shouldn't change unless you locked in a rate that expired or have had a valid change of circumstances
Loan amount: might change slightly based on final purchase price adjustments
Closing costs: small variations are normal, but large differences warrant questions if there’s been a significant change of circumstances
If you find problems or discrepancies that aren't adequately explained, don't hesitate to postpone closing. While nobody wants delays, rushing through closing with errors or unexpected terms can cost you significantly more in the long run.
Closing costs typically range from 2% to 5% of your loan amount and cover the various services and administrative expenses required to complete your mortgage. On a $350,000 loan, expect closing costs between $7,000 and $17,500.
Appraisal fee: $400-$600 for a professional property valuation
Title search and insurance: $1,000-$2,500 to verify ownership and insure against title defects
Attorney fees: $500-$1,500 in states requiring attorney involvement
Credit report: $25-$50 per borrower
Survey fee: $400-$800 for a property boundary survey
Recording fees: $50-$250 for filing documents with local government
Prepaid items: First year of homeowners insurance, initial escrow deposits, prepaid interest
Loan origination fee: Typically 0.5%-1% of loan amount
Some lenders advertise "no closing cost" mortgages, but this doesn't mean the costs disappear—instead, they're built into a higher interest rate. Calculate whether paying costs upfront or accepting a higher rate saves more money based on how long you plan to keep the mortgage.
A balloon mortgage features regular monthly payments that don't fully amortize the loan by maturity, requiring a large lump-sum payment at the end of the term. For example, you might make payments as if you have a 30-year loan, but the entire remaining balance comes due after 5 or 7 years.
Balloon mortgages are risky for borrowers. If you can't refinance when the balloon payment comes due—perhaps because your home value dropped, your credit declined, or lending standards tightened—you might face foreclosure. The CFPB warns that balloon payments can be especially problematic if you're counting on selling or refinancing to cover them.
A prepayment penalty charges you a fee for paying off your mortgage early, either by refinancing or paying extra principal. While less common today, some lenders offer slightly lower interest rates in exchange for a prepayment penalty clause lasting 2-5 years.
Before accepting a loan with a prepayment penalty, calculate the trade-off. If the interest rate savings exceed what you'd pay in penalties given your refinancing timeline, the clause might work in your favor. However, most borrowers benefit more from flexibility to refinance or pay extra principal without restriction.
A rate lock freezes your interest rate for a specific period, typically 30, 45, or 60 days, while your loan processes. This protects you if market rates increase between application and closing. If rates drop during your lock period, some lenders offer a "float-down" option letting you capture the lower rate, usually for a fee.
Lock your rate when you've found an acceptable interest rate and are confident closing will occur within the lock period. If closing delays beyond your lock expiration, you might need to extend or accept whatever the current market rate happens to be. At AmeriSave, we offer competitive rate lock periods and work diligently to close your loan within the locked timeframe.
Conventional loans with less than 20% down require private mortgage insurance, which protects the lender if you default. PMI typically costs 0.5% to 1.5% of the original loan amount annually, paid monthly. On a $300,000 loan, PMI might range from $125 to $375 per month.
The good news: PMI isn't permanent. Under federal law, lenders must automatically cancel PMI when your loan balance reaches 78% of the original home value, provided you're current on payments. You can request cancellation once you reach 80% LTV, often achievable through a combination of principal payments and home appreciation.
Home equity represents the portion of your property you actually own outright—calculated as your home's current value minus your remaining mortgage balance. If your home is worth $450,000 and you owe $320,000, your equity is $130,000.
You build equity two ways: first, by paying down your mortgage where each principal payment increases equity, and second, through property appreciation when your home increases in value.
Let's track equity building over time: You buy a $400,000 home with $40,000 down, creating $40,000 in initial equity. After five years, you've paid your balance down to $345,000 through regular payments, and your home appreciated to $440,000. Your equity jumped to $95,000 ($440,000 - $345,000), a 137.5% increase driven by both appreciation and debt reduction.
Your loan becomes delinquent when you miss a payment or don't pay the full amount by the due date. After about 30 days of delinquency, your lender reports it to credit bureaus, damaging your credit score. Default occurs when delinquency continues beyond the grace period specified in your mortgage documents, typically after 90-120 days.
According to the CFPB, if you're struggling with payments, contact your servicer immediately. Federal regulations prohibit servicers from starting foreclosure until you're more than 120 days delinquent, giving you time to explore alternatives.
Forbearance provides temporary relief by reducing or suspending your mortgage payments while you recover from financial hardship. During forbearance, your lender agrees not to pursue foreclosure, though interest typically continues accruing on your balance. Forbearance isn't loan forgiveness—you'll eventually need to repay the missed payments through a repayment plan, loan modification, or paying a lump sum.
Many borrowers who received forbearance during the COVID-19 pandemic mistakenly thought their missed payments were forgiven. Always get your forbearance agreement in writing and understand exactly how you'll repay the suspended amounts before the forbearance period ends.
A deed-in-lieu of foreclosure lets you voluntarily transfer your home's title to the lender to avoid the foreclosure process. This option typically requires that you've unsuccessfully tried to sell your home for at least 90 days and that no other liens cloud the title.
While a deed-in-lieu damages your credit less than a foreclosure and may allow you to avoid deficiency judgments, it still significantly impacts your credit report and future borrowing ability.
A biweekly payment plan involves making half your monthly payment every two weeks instead of one full payment monthly. This results in 26 half-payments annually, equivalent to 13 full payments, rather than the standard 12 monthly payments.
Let's calculate the impact: On a $300,000 loan at 6.5% interest over 30 years, your monthly payment would be $1,896 for principal and interest. With biweekly payments, you'd pay $948 every two weeks. Because you make one extra monthly payment annually, you'd save approximately $65,000 in interest and pay off the loan about 4 years early.
Before committing to biweekly payments, check whether your lender charges setup fees and confirm you won't incur prepayment penalties. You can achieve the same savings by making one extra monthly payment annually or adding 1/12 of your monthly payment to each regular payment—without any special program or fees.
Construction loans provide short-term financing, usually 6-18 months, to cover building costs for new homes. Instead of receiving the full amount upfront, the lender disburses funds in stages as construction progresses—foundation completion, framing, rough utilities, finishing work, and final inspection.
During construction, you typically pay interest only on the amount disbursed so far. Once construction completes, the loan either converts to a permanent mortgage or you obtain separate permanent financing to pay off the construction loan.
Construction loans carry higher interest rates than permanent mortgages because lenders face greater risk—the collateral doesn't fully exist yet. Expect rates 0.5% to 1.5% higher than comparable permanent mortgages, plus fees for each inspection and draw.
The CFPB research shows that borrowers who obtain quotes from multiple lenders save an average of $3,000 over the life of their loans compared to those who accept the first offer.
APR: The most comprehensive cost comparison
Closing costs: Both lender fees and third-party services
Rate lock period: Ensure it covers your expected closing timeline
Customer service: Responsiveness and clarity during the application process
Don't focus solely on interest rate. A lender offering 6.25% with $8,000 in fees might cost more than a lender offering 6.50% with $2,000 in fees, especially if you plan to refinance or sell within a few years.
The Truth in Lending Act says that lenders must show the APR and total finance charges, which lets people compare costs.
The Real Estate Settlement Procedures Act says that the Loan Estimate and Closing Disclosure must be given, that settlement service providers can't give each other kickbacks, and that escrow account balances can't be too high.
The Equal Credit Opportunity Act says that lenders can't discriminate against people based on their race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
The Home Ownership and Equity Protection Act gives extra protections to mortgages with high interest rates.
You can file a complaint with the CFPB at consumerfinance.gov or call 1-855-411-CFPB (2372) if you think a lender broke the law.
Understanding the language of mortgages turns what seems like an impossible task into a doable journey. You've learned how conforming loan limits will work in 2025, the most important difference between APR and interest rate, how amortization builds your equity over time, and what lenders look at when deciding whether or not to give you a loan. You now know the differences between FHA, VA, USDA, and conventional loans, as well as the steps involved in closing a loan, from the Loan Estimate to the final settlement.
With this information, you can ask the right questions, compare offers correctly, and tell if you're getting a good deal. Even though mortgage terms may seem hard to understand at first, remember that each one has a useful purpose that can help you make smart choices about how to pay for your home. Don't rush through the loan papers. If you don't understand something, don't be afraid to ask for help. Also, compare loans from different lenders to make sure you're getting the best deal.
You can now go through the process of buying a home with confidence because you know the most important mortgage terms. We at AmeriSave believe that borrowers who know more make better decisions and have an easier time with the mortgage process. Our team is ready to help you look into your mortgage refinance options, whether you're buying your first home, refinancing your current home, or buying your next home.
We offer a lot of different types of mortgages, including conventional loans, FHA loans for people who can only put down a small amount of money, VA loans for military members, and USDA loans for rural properties that meet certain requirements. Our digital mortgage platform makes it easy to apply online, see the status of your loan in real time, and talk to your loan officer whenever you have a question. We help you with every step of the process, from applying to closing, and we give you clear, honest Loan Estimates with no hidden fees and low interest rates.
Get preapproved today so you can move forward with buying a home. You can start your application at AmeriSave.com, or you can call one of our mortgage experts who can answer your questions and help you choose the loan program that works best for your budget. You need to know how the process works to buy a house. We're here to help you every step of the way.
Prequalification doesn't check your information, but it gives you a rough idea of how much you might be able to borrow based on your income, debts, and assets. Most of the time, it's a quick, informal test that gives you a general idea of how much you can afford to buy, but sellers don't trust it because nothing has been verified. On the other hand, preapproval means that your money will be carefully looked at. This includes a hard credit check, proof of income through pay stubs and tax returns, and proof of your down payment funds through asset documentation. The lender looks at your whole financial picture and gives you a conditional commitment for a certain amount of money. When you make offers on homes, this makes you a lot stronger. Sellers and real estate agents want you to be preapproved because it shows that you are a qualified buyer and that your financing is likely to go through. Getting preapproved usually takes a few days and some paperwork, but it's an important step to take before you start house hunting.
The amount of money you need to put down on a loan depends a lot on the type of loan you get. You have more options than you might think. Programs like Fannie Mae's HomeReady or Freddie Mac's Home Possible can help first-time buyers get a conventional loan with just 3% down. Most conventional borrowers, on the other hand, put down 5% to 20%. If your credit score is 580 or higher, you only need to put down 3.5% for an FHA loan. This means that people with little money can get them. VA loans let qualified service members, veterans, and surviving spouses borrow money without having to put down a down payment or get mortgage insurance. USDA loans also let people with low to moderate incomes buy homes in eligible rural and suburban areas with no down payment. If you put down 20% or more on a conventional loan, you won't have to pay mortgage insurance and your monthly payments will be lower. This can help you compete in hot real estate markets. But a lot of successful home buyers put down small amounts of money, especially when they have to wait to save more money and watch prices and interest rates go up. It's most important to know what each loan program requires and choose the one that fits your budget and when you want to buy a house.
Yes, but you have fewer options and pay more than people with good credit. It's easy to get an FHA loan. If your credit score is 500 and you put down 10%, or 580 and you put down only 3.5%, you can get one. Some traditional lenders will work with people whose scores are around 620, but you'll have to pay more interest and maybe a bigger down payment. VA loans are a little flexible when it comes to credit scores for veterans who qualify, but each lender has its own minimum, which is usually between 580 and 620. To improve your credit, focus on the basics: pay all your bills on time (payment history is the most important factor in your score), keep your credit card balances below 30% of your limits (ideally below 10%), dispute any mistakes on your credit reports from the three major bureaus, don't open new credit accounts before applying for a mortgage, and if you can, become an authorized user on someone else's well-managed credit card. Even small changes to your score can save you a lot of money in interest over the life of your loan. If your score goes from 620 to 680, your interest rate could drop by more than half a percentage point. This would help you save a lot of money over the course of a 30-year mortgage. If you want to raise your credit score before you apply, you might want to work with a HUD-approved housing counselor.
You should think about refinancing if you can get a lower interest rate of at least 0.75–1%. This usually saves you enough money each month to pay for the closing costs. To figure out where you break even, divide your total refinancing costs by the amount of money you save each month. Refinancing is a good idea if you plan to keep the mortgage for more than that. If you're having trouble with money, you might want to refinance to lower your monthly payments or change the length of your loan. For example, you could go from a 30-year mortgage to a 15-year mortgage to build equity faster and save a lot of money on interest. You could also refinance to get rid of mortgage insurance once you have enough equity, to use your home's equity to buy big things like home improvements or pay off debt, or to switch from an adjustable-rate mortgage to a fixed-rate loan if you want your payments to stay the same. You should also know when to buy a house. You might be able to get much better terms if your credit score has gone up a lot or if interest rates have gone down since you got your first mortgage. But don't keep refinancing just to get small rate cuts, because you'll have to pay closing costs every time. Be careful about cash-out refinancing to pay for things you don't need, though, because you're turning home equity into debt that you have to pay back with interest.
Call your mortgage company right away. The sooner you tell them about your money problems, the more choices you'll have. When borrowers are having trouble with their money, whether it's short-term or long-term, lenders and servicers usually offer a number of ways to help them keep their homes. Forbearance plans give you short-term relief by lowering or stopping your payments for a set amount of time, usually 3 to 12 months, while you get back on your feet after a temporary setback like losing your job or having a medical emergency. Loan modifications make it easier to pay back your loan by changing the terms of the loan permanently. This could mean lowering your interest rate, extending the term of your loan, or adding missed payments to the amount you owe. If you have a repayment plan, you pay off your missed payments over the course of several months by adding a small amount to each regular payment until you are caught up. Servicers can't start the foreclosure process until you've missed more than 120 days of payments, so you have a lot of time to look into these other options. Some servicers also offer principal forbearance, which means that while you pay off the rest of your balance, they hold part of it at zero interest. If you don't take care of the problem, it will only get worse. You could lose your home, hurt your credit, and even have to pay a deficiency judgment if your home sells for less than what you owe on your loan. Don't wait until you've missed a few payments. Talking to your lender ahead of time often leads to better solutions and helps you keep your home and credit rating.
Lenders require private mortgage insurance for conventional loans with less than 20% down payment because borrowers with little equity are more likely to default. You can't change this; it's a rule that you have to follow to get the loan with a small down payment. You have to pay premiums for FHA loans no matter how much you put down, and you have to pay them both up front and every year. If you put down less than 10%, the annual premiums will last for the life of the loan. VA loans don't need mortgage insurance, but they do charge a one-time funding fee that protects the VA loan program in a similar way. USDA loans don't have regular mortgage insurance. Instead, they charge both upfront and yearly guarantee fees. Depending on the size of your loan and down payment, mortgage insurance can add $50 to $300 or more to your monthly costs. But it lets you buy a home with a smaller down payment, so you can buy it sooner instead of waiting years to save 20%. PMI on regular loans is great because it ends on its own when your loan balance drops to 78% of the original value of your home. You can also ask for it to end when the LTV reaches 80%. This happens when you pay off your mortgage and the value of your home goes up. Many buyers, especially in markets that are going up, would rather pay PMI for a few years than keep renting and miss out on building equity and taking advantage of rising home values.
It's important to know the difference between your down payment and closing costs because you have to pay both of them at closing. The down payment is the part of the purchase price that you pay with your own money instead of borrowing it. It also has a direct impact on the size of your loan and your monthly payment. If you want to buy a $400,000 home and put down 10%, you would pay $40,000 down and borrow $360,000. You would then have to make monthly payments on that amount. Closing costs, on the other hand, are the fees and charges you have to pay to finish your mortgage deal. These costs include things like an appraisal, a title search, insurance, attorney fees, loan origination fees, credit reports, surveys, and things that are paid for in advance, like property taxes, homeowners insurance, and interest. Most of the time, these costs are 2–5% of the total amount of your loan. If you were buying a $400,000 house with 10% down, you would need about $40,000 for the down payment and between $7,200 and $18,000 for closing costs. This means that you would need between $47,200 and $58,000 in cash at the closing. Some buyers only think about how to save for their down payment and are shocked by the extra costs at closing. You can ask sellers to give you back some of the closing costs, or you can get a "no closing cost" mortgage, which means that the costs are added to a slightly higher interest rate. But you can't usually get a loan for your down payment. It's important to plan for both costs ahead of time so you don't have to worry about money at the last minute and the closing goes smoothly.
An assumable mortgage lets a buyer take over the seller's existing loan, including its interest rate, remaining balance, and original terms. This is better than getting new financing at current market rates. Most regular loans can't be assumed, but FHA, VA, and USDA loans can be, as long as the lender agrees and the buyer meets the program's requirements. When rates are going up, loan assumption is very helpful. If a seller has a 3.5% FHA mortgage from 2021 and rates are now 7%, a qualified buyer who takes over that loan could save hundreds of dollars a month compared to getting new financing. The buyer would have to pay the seller's equity in cash or with a second mortgage because they are only taking over the loan balance. If the house sells for $400,000 and the assumable loan balance is $280,000, the buyer needs $120,000 in cash or a second loan to make up the difference. The lender has to agree to the assumption, and the buyer has to be able to afford the assumed loan. Usually, there is a small fee for this. People used to make assumptions more often in the 1980s, when interest rates were high. But now that rates are going up and low-rate mortgages are becoming more valuable, they are back in style. Buyers should ask sellers if their loan is assumable when they find homes that may have been bought with a loan when rates were lower. Not every seller will say this.
There is no one right answer to the question of whether or not you should pay off your mortgage early. What you want, how much risk you're willing to take, and your overall financial situation all play a role. From a purely mathematical point of view, look at your mortgage rate and the amount of money you could make by investing that extra money instead. If your mortgage rate is 4% and you can consistently make 8% by investing in a variety of assets, the numbers favor investing over paying off your mortgage early. This is especially true if you remember that mortgage interest is tax-deductible. But the peace of mind that comes from owning your home outright and not having to pay a big monthly bill is worth more than what math can show. A lot of people sleep better at night knowing they own their home free and clear, even if it's not the best choice mathematically. You might want to think about paying extra principal if you've already paid off high-interest debt like credit cards and auto loans, have enough emergency and retirement savings, are getting close to retirement and want to lower your fixed costs, or your mortgage is your last big debt and getting rid of it would make you feel a lot better. But if you have a lot of debt with high interest rates, don't have enough savings to cover three to six months' worth of bills in case of an emergency, aren't fully using your employer's 401(k) match, or could get more out of investing in your career or your children's education, you should focus on other financial goals. Also, think about the interest rate on your mortgage: paying off a 3% mortgage early is not as smart as paying off a 7% mortgage early. Some homeowners find a middle ground by making one extra payment every year. This lets them pay off a 30-year mortgage four to five years early without having to make big changes to how they live.
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