Freddie and Fannie Who?! 13 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, according to a recent study from credit bureau TransUnion, a whopping 34% of first-time homebuyers aren’t familiar with a single mortgage financing option whatsoever. Another two-thirds of first-timers 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 will finance it), clearly, you’re not alone. Want to make sure you’re ready? This guide can help.
13 Mortgage Terms You Should Know Before Buying a Home
To start, let’s cover Fannie Mae and Freddie Mac, which TransUnion’s survey shows 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 (or portfolios of 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 re-sell it later on, you may get a letter from one of the organizations detailing who your new servicer is and where you should send your payments to. Other than that, you won’t need to worry about either organization as you go about buying your home.
Here are some more urgent mortgage terms you’ll want to know if buying a house is on your radar:
- Down payment – Think of the down payment as your deposit on the house. Every mortgage program has a different down payment requirement, so you might need to put down anywhere from 10% (of the home’s purchase price) or nothing at all, depending on your loan. 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.
- FHA loan – This is a type of government-insured mortgage that is usually easier to qualify for than other loan options. It requires at least a 3.5% down payment and both up-front and annual mortgage insurance premiums. Other government loans include USDA loans (for rural properties) and VA loans (for veterans and military members).
- 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%.
- Points – Also called “discount points,” points are a way you can 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).
- Closing costs – These encompass a wide variety of fees and charges for originating, underwriting, and processing your loan. There are also attorney’s fees, charges for pulling your credit, surveyor fees, and more. These are paid on closing day.
- Mortgage lender – This is the bank or financial institution actually loaning you the money. You’ll apply with them, they’ll underwrite your loan, and see you through until closing. However, if they sell the loan to Fannie Mae, Freddie Mac, or new servicer, you may not send your payments to them.
- Mortgage broker – A mortgage broker is essentially a personal shopper for mortgage loans. They’ll gather your financial information and help you find the best-suited mortgage loan for your situation. They may charge a fee for this or get paid a commission by the lender you ultimately choose. Mortgage brokers may also handle your application for you and attend your closing appointment.
- 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.
- 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.
- Adjustable-rate – With an adjustable-rate (sometimes called variable-rate) loan, your interest rate changes over time. If you had a 5/1 adjustable-rate loan, for example, your rate would adjust after five years, and one time annually after that. With a 7/1 loan, it’d be every seven years.
- 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 if you have a conventional loan. On FHA loans, your premium is paid up-front (at closing) and then again annually (split monthly across the year). If you have a conventional loan with mortgage insurance, you’ll only pay it monthly.
Do you need more help understanding 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.