Home Loan Basics

It is important for a home buyer to know the Home Loan Basics.  Today, as never before, there are mortgages available for virtually every home buyer. Whether you want lower payments, a bigger loan or have credit problems, there’s almost certainly a mortgage out there to fit your needs.

While there are literally hundreds of different types of mortgages available, most of them fit into certain popular categories, noted below. Before checking them out, however, it’s worth a few moments to take a look at some of the more common terms used by lenders. This will help you understand what’s involved when you’re mortgage hunting.

Points. This represents a discount paid to the lender. One point is equal to 1% of the mortgage. On a $100,000 mortgage, one point is equivalent to $1,000.
Interest rate. This is the rate of interest on which the monthly payment is based. It is almost always lower than the APR (Annual Percentage Rate) because it does not include points and other fees that the APR does include.
Trading off. Many lenders today allow borrowers to trade points for a lower interest rate (and vice-versa). A buyer with more cash but less ability to handle high monthly payments, might pay additional points. This would result in a lower interest rate and, consequently, in lower payments. A point traded off is roughly equivalent to a 3/16% reduction in the interest rate. Paying an extra three points, therefore, would lower the interest rate by about half a percent.
Buy-down. This is when the seller pays points to the lender so that the borrower will get a lower interest rate and, as a result, lower monthly payments. Buy-downs are sometimes conducted by builders to encourage buyers to purchase homes when interest rates are high, although any seller may do it.
Amortization. This term means paying back a mortgage in equal installments.
Balloon payment. One payment, usually the last, which is higher than all the other mortgage payments.
Loan-to-value (LTV). This is the percentage of the appraised value of the property that the mortgage will cover. For example, an 80% LTV means that on a $100,000 appraised value, the loan will be $80,000