There's a lot to learn when buying a home, esepcially for the first time. But becoming familiar with the real estate world is a lot like learning the military lifestyle. It’s the extensive lists of specialized terminology and the endless acronyms that provide a unique parallel between them.
There are so many military acronyms in use that it's impossible to know them all. You learn the ones that matter, like BAH, and they become second nature. It's the same with real estate.
Whether you’re new to real estate lingo or you need a refresher, we've compiled a guide to help you understand home loan terminology in no time.
Decoding Mortgage Basics
Homes are expensive, usually more expensive than the cash you've saved. You might have enough money for a down payment, but not many people have $ 350,000 or more to pay for a home outright. So, most homebuyers turn to the bank for a loan, which becomes the mortgage.
Types of Mortgages Explained
Annual Percentage Rate (APR): The rate of interest paid to the mortgage lender. The rate can either be fixed-rate or adjustable-rate.
Fixed-Rate Mortgage (FRM): A mortgage which has an interest rate set for the duration of the loan.
Many homebuyers favor an FRM because it’s considered low risk. Since the interest rate remains constant from the time the buyer takes out the loan, they’re immune to market fluctuations. Fixed-rate mortgages can be ideal for homebuyers who plan to hold on to the property indefinitely.
However, should the buyer want to assess a current market value after owning their home for several years, they’ll need to pay to refinance the home. Refinancing can open up the mortgage to fluctuate one way or the other, depending on the home’s value in the housing market at the time. That said, it's not a requirement, and the homeowner can choose to refinance at a time when the market works in their favor and potentially reduce their mortgage payments.
Adjustable-Rate Mortgage (ARM): An ARM is a type of mortgage in which the interest rate applied to the outstanding balance varies throughout the life of the loan. The initial interest rate is fixed for a set period, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread called an ARM margin.
The first number refers to the number of years the rate is set, and the second number refers to how often it adjusts following the fixed period. For example, if the buyer has a 5/1 ARM, the rate is set for five years and then adjusts every year after.
Adjustable-rate mortgages assume a great deal of risk. The rates can rise, and if they do, monthly mortgage payments can increase significantly. Additionally, if the ARM has a limit on how much the borrower can pay on their loan each month, there's a risk of negative amortization. Negative amortization occurs when payments don’t keep pace with interest—creating more debt.
However, since banks account for market changes, most will launch an ARM at a lower interest rate. If a buyer plans to only own the home for a few years before selling it (such as a military member serving 2-3 years at a duty station), they may not even feel a shift in the market. While not impossible, a huge market increase during those few years of homeownership is unlikely.
Mortgage Variables That Affect Your Monthly Payment
Adjustable-Rate Mortgage Margin: A fixed percentage added to the current value of an ARM’s chosen index to determine the fully indexed interest rate. The margin remains the same for the life of the loan, while the index value can change at each adjustment period.
Mortgage Interest: The cost charged by a lender for borrowing money to purchase or refinance a home. This is calculated as a percentage of the loan balance and paid over the life of the loan. Mortgage interest applies to first mortgages, second mortgages, and home equity loans (or lines of credit), as long as the loan is secured by the property.
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Mortgage Insurance: A policy that protects the mortgage lender against financial loss if the homebuyer defaults on the loan. It does not cover the buyer in the event of death or disability; that’s “mortgage life insurance,” which is a separate product. Mortgage insurance is most often required on certain loans with smaller down payments or higher loan-to-value ratios.
Private Mortgage Insurance (PMI): A type of mortgage insurance provided by private companies to protect a lender if a borrower defaults. PMI is typically required when a homebuyer’s down payment is less than 20% of the purchase price, resulting in a loan-to-value ratio over 80%. For most conventional loans, PMI can be canceled once the loan balance reaches 78–80% of the home’s original value.
Beyond the Mortgage: More Home Loan Lingo
There’s more to home loans than the mortgage itself. It’s best to familiarize yourself and enter the real estate transaction with a larger knowledge base.
While these cover the large majority of common terms you’ll hear, there are more. But, just as with military lingo, it isn't necessary, nor reasonable, for any one person to have every term memorized. Following are some frequently used terms.
Down Payment: The amount of the purchase price that the home buyer pays upfront. Generally, lenders require a specific down payment to qualify for a mortgage.
Home Equity: The value of the homeowner's interest in the property, calculated by subtracting any outstanding liens from the home’s current market value. Home equity changes over time as the mortgage balance decreases and as the property’s market value rises or falls.
Appraisal: An unbiased professional opinion of a home's value. Appraisals are necessary in purchase and sale transactions as well as refinance transactions. In a sale transaction, an appraisal determines whether the home's contract price is appropriate, given the home's condition, location, and features.
Home Refinancing: The process of obtaining a new mortgage to reduce monthly payments, lower the interest rates, take cash out of the home for large purchases, or change mortgage companies.
Many homeowners choose to refinance to reduce the mortgage rate and fund other larger purchases. Here’s how it works.
The home is appraised, and the lender determines the maximum amount they're willing to loan. The balance of the original mortgage is then subtracted, and the remaining equity is given to the homeowner as a loan. Refinancing under the right conditions is a great opportunity to reduce the mortgage interest and invest money back into the property through updates, remodels, and modifications.
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Amortization: The schedule that outlines how a loan is repaid over time. For example, a typical amortization schedule for a 15-year loan details the original loan amount, interest rate, and loan term, breaking down each monthly payment into portions applied toward interest and principal.
Escrow: At the closing of the mortgage, the borrowers are required to set aside a percentage of the yearly taxes to be held by the lender. Every month, the lender will also collect additional money to pay the taxes on the home. This escrow account is maintained by the lender, who is responsible for sending the tax bills regularly.
Home Inspection: An examination of the condition of a real estate property. A qualified home inspector can assess the condition of a property's roof, foundation, heating and cooling systems, plumbing, electrical work, water, and sewage, as well as fire and safety issues. The home inspector will also look for evidence of insects or any other concerns that may affect the property's value before closing.
VA Loan Assumption: A process that allows a qualified buyer to take over (or "assume") the seller’s existing VA home loan rates, often with the same interest rate and terms. This option can be beneficial for buyers if the original loan has a lower rate than current market rates. The buyer must meet VA and lender requirements to qualify for an assumption.
Types of Home Loans
Here's a brief overview of loans you should be familiar with and eventually consider when it comes time to take out a loan.
For more detailed information regarding each type of loan, read How to Compare Loan Options as a Military Home Buyer.
VA Loan: The VA Home Loan program is for veterans, active-duty military, and some eligible family members, offering competitive interest rates and often requiring no down payment or private mortgage insurance.
FHA Loan: A government-backed loan insured by the Federal Housing Administration (FHA), designed to help qualifying buyers, especially first-time homebuyers, secure financing with lower credit and down payment requirements.
USDA Loan: A loan program backed by the U.S. Department of Agriculture to assist eligible buyers in rural and suburban areas, offering low or no down payment options for those with moderate to low incomes.
Conventional Loan: A mortgage not insured or guaranteed by the government, typically requiring a higher credit score and down payment. These loans often require private mortgage insurance if the down payment is less than 20%.
MilitaryByOwner Supports Military Homebuyers
In addition to researching types of loans, stay current on rebates and incentives for military homebuyers and sellers.
Whether you’re stationed near home or moving across the country, MilitaryByOwner is here to help you find your next house with confidence. Click the image below to explore listings today and take advantage of resources tailored just for military and veteran buyers like you.
