Home Building Tips

Key Terms for Home Financing

Many first time home buyers feel overwhelmed by the home financing process. Buying a house is a big decision, and it’s important to know what you’re getting into, especially in terms of financing.

The biggest mistake you could make is agreeing to something that you don’t fully understand. Here are some key terms from the National Association of Home Builders that you’ll likely come across when you’re financing a home:

Adjustable Rate Mortgage (ARM): Loan whose interest rate is adjusted based on movements in the financial market.

Amortization: The borrower reduces debt through regular payments of principal and interest. Typically borrowers have an amortization schedule.

Assumption: Buyer assumes payment of the existing loan on the house rather than getting a new loan.

Balloon payment: A type of loan that has a series of monthly payments with the remaining balance owed in a large lump sum payment at the end.

Convertibility: Ability to change an adjustable rate schedule to a fixed rate schedule.

Fixed Rate Mortgage: Loan whose interest rate remains stable.

Level Payment Mortgage: Payments are identical each month over the life of the loan.

Mortgage Origination Fee: Fee charged by lender to prepare mortgage application fee (typically one percent of mortgage amount).

Principal: The amount borrowed for a loan. This amount excludes interest and other fees or charges.

Source: NAHB