With all the stress of buying a home, navigating mortgages can be the straw that breaks the camel's back. Here are some general overviews of the more common types of mortgages, as well as some vocabulary lessons.
escrow - an account in which a neutral third party holds the documents and money in a real estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held unti paid; money is added to the account every time a mortgage payment is made.
mortgage - the charging of real (or personal) property by a debtor to a creditor as security for a debt ( especially one incurred by the purchase of the property), on the condition that it shall be returned on payment of the debt within a certain period.
prepayment penalty - a fee charged to borrowers who pay a loan off faster than the prescribed payment schedule.
principal - amount of debt, not including interest, that remains on a loan.
adjustable-rate mortgage - also known as a variable-rate mortgage, this is a mortgage whose rate of interest is adjusted periodically to reflect market conditions. Many have capped interest rates.
balloon mortgage - a loan which offers smaller monthly payments over a period of time (typically between 3 and 10 years). Then, the principal balance must be paid off in a lump sum, or balloon payment.
FHA (Federal Housing Administration) loan - a mortgage that is insured by the Federal Housing Administration.
fixed rate mortgage - a home loan, typically with a lifespan of 15 or 30 years, whose interest rate does not change.
interest-only mortgage - adjustable-rate mortgage that lets the borrowers pay only the interest for a specified period of time.
reverse mortgage - loan available to homeowners age 62 and older, where the lender makes payments to the borrower by converting some of the equity in the home into cash. The loan does not need to be paid back as long as the borrower lives in the house.
VA loan - a mortgage that is insured by the Department of Veterans Affairs.