Basics of home loans: What borrowers should be aware of

When you want to purchase a house but cannot afford it from your own resource, you can obtain a mortgage. Home loan helps you fulfill your dream of having your own house. It uses the house as collateral to guarantee its repayment. There are different types of  mortgages and various terms associated with them that you must know before applying for it. You can gather basic knowledge about these from a dictionary for home mortgage terms.

How can a dictionary for home mortgage terms help you?

You can learn about the various costs associated with obtaining a mortgage by going through a dictionary for home mortgage terms. Some of the terms that you must know are:

• Appraisal: It is the estimate of the present value of your property. Lenders appraise your home before offering you a loan.

• Annual percentage rate: It is the yearly interest rate on home loan including all costs associated with it.
• Closing cost: The total amount you have to pay to your lender on the day your loan gets approved is the closing cost including application fees, appraisal fees, home owners insurance, etc.

What are the factors that determine the size of your loan?

Lenders use certain ratios to determine the size of your loan. You can find out about these ratios from a dictionary for home mortgage terms. The ratios are:

• Housing-to-income ratio: Your monthly mortgage payment, including interest payments, homeowners insurance and property tax compared to your gross monthly income (before tax deduction) is known as housing-to-income ratio. This ratio should not exceed 28% in case of conventional loans.

• Debt-to-income ratio: Your gross monthly income divided by the sum of monthly debt obligation including the new mortgage gives the debt-to-income ratio. For conventional mortgages, a ratio above 36 % is considered risky by lenders.

The size of your home loan also depends on your down payment. When you’re planning to buy a house with a home loan, a knowledge of the terminology will help you understand the terms and conditions mentioned on your loan contract and prevent you from falling into traps of fraudulent lenders.