Freddie and Fannie Who?! 11 Mortgage Terms You’ve Heard and May Not Understand

The mortgage process can be pretty overwhelming, especially if it’s your first time around the block.

In fact, a majority of first-time homebuyers aren’t familiar with a single mortgage financing option, and many don’t know who Fannie Mae and Freddie Mac are.

If you’re feeling confused or overwhelmed about your upcoming home purchase — or how you’ll finance it! — you’re not alone. Want to be better prepared? This guide can help.

11 Mortgage Terms You Should Know Before Buying a Home

To start, let’s cover Fannie Mae and Freddie Mac, which aren’t well-known terms for the average American.

Fannie Mae and Freddie Mac are two government-established organizations that help support the housing market. Both entities purchase mortgages from lenders and sell them off to investors. This allows lenders to retain capital and keep making new loans to borrowers, thus supporting the overall housing market.

As a buyer, you won’t interact with Fannie or Freddie directly. In the event they purchase your loan and resell it later, you may get a letter from one of the organizations detailing who your new servicer is and where you should send your payments. Other than that, you won’t need to worry about either organization as you go about buying your home.

Here are some more mortgage terms you’ll want to be familiar with when buying a home:

1. Down payment– Think of the down payment as your deposit on the house. Every mortgage program has a different down payment requirement. Depending on the type of loan, you’ll need to put down anywhere from 10% (of the home’s purchase price) to nothing at all. Keep in mind that the lower your down payment is, the higher your loan’s interest rate will likely be — and the more you’ll pay in interest over time.
2. FHA loan – This is a type of government-insured mortgage that is easier to qualify for than other loan options. It requires a 3.5% down payment and both upfront and annual mortgage insurance premiums. Other government loans include USDA loans which are for rural and some suburban properties and VA loans which are for veterans and military members. Both USDA and VA loans do not require a down payment.
3. Conventional loan– Conventional loans are generally harder to qualify for but they don’t always require mortgage insurance. Down payments on Conventional loans go as low as 3%.
4. Points – Also called “discount points,” points can help you buy down your interest rate. You’ll pay 1% of your loan balance and get anywhere from 0.25% to 0.50% off your rate. The amount varies depending on your loan and market conditions.
5. Closing costs – These encompass a variety of fees and charges for originating, underwriting, and processing your loan. There are also charges for pulling your credit, attorney and surveyor fees, and more. These are paid on closing day.
6. Mortgage lender – This is the bank or financial institution loaning you the money. You’ll apply with them, and they’ll underwrite your loan and see you through the process until closing. However, if they sell the loan to Fannie Mae, Freddie Mac, or another servicer, you may not send your payments to them.
7. Loan officer – A loan officer is a professional who assists you in getting a mortgage to purchase a home. They’ll guide you through the loan application process, explain loan terms and conditions, and help you find the best lending products available for your situation.
8. Pre-approval – Pre-approval is when a mortgage lender has reviewed your financial information, pulled your credit, and determined you’re a likely candidate for a mortgage loan. Once preapproved, you’ll get a letter stating so. It should also include your maximum loan amount and possible interest rate.
9. Fixed-rate – A fixed-rate loan means the interest rate stays the same for the entire loan term. It does not change over time, no matter how market conditions fluctuate.
10. Adjustable-rate – An adjustable-rate mortgage (ARM) means the interest rate can change during the loan term. ARMs typically start with a fixed interest rate for a set period (e.g., 5 years, 7 years), after which the rate adjusts periodically based on a market index. This means your monthly payments could increase or decrease depending on the direction of interest rates. 
11. Mortgage insurance – Mortgage insurance helps protect your mortgage lender in the event you fall behind on your loan. It is required on all FHA loans but may not be required on a Conventional loan.

If you want to learn more about the mortgage process, we’re here for you. Get in touch with a loan officer at Embrace Home Loans today, and we’ll guide the way.