Don't Confuse These Terms, And Their Significance, When Buying A Home

Buying a home can be both complicated and confusing to a first-timer, and this can lead to wastage of resources. The confusion can be caused by something as "simple" as the failure to understand some ofthe real estate terms. Here are some of the real estate terms that first-time buyers can confuse.

Balloon Mortgage vs. Assumable Mortgage

When you take a balloon mortgage, you are required to make regular monthly payments for several years and then pay the rest of the money as a lump sum (a "balloon"). This is unlike other types of mortgages that you pay on a monthly basis for its entire term. Balloon mortgages tend to attract lower rates than other forms of mortgages, but it is risky because you need to make a large payment at the end of the initial monthly-payments period.

An assumable mortgage is one that you can pass on to another person with ease. When you have an assumable mortgage of, for example, 25 years and want to sell the house after 15 years, the new owner will "assume" your loan obligations and continue with the repayments just as you would have done. This form of mortgage is good for you if you don't plan on staying in the same place forever and want to be able to sell the property easily.

Adjustable Mortgage Rate vs. Annual Percentage Rate

An adjustable mortgage rate (AMR) is tied to a designated market indicator, which means they fluctuate together. The market indicator can be something like the U.S. Treasury Bill; in such a case, your mortgage rate will rise when the weekly average of the U.S. Treasury Bill rises and fall when the weekly average of the U.S. Treasury Bill falls. A potential benefit of AMR is low-interest rates, but there is also the risk of paying high interest when the market indicator the AMR is tied to rises.

The Annual Percentage Rate (APR), on the other hand, is a yearly interest rate that you are charged for the mortgage. It takes into account all the upfront fees and costs of acquiring a mortgage that you will pay for the term of the loan. Once you know the APR, you will have a good idea of the cost of your mortgage and will also be able to compare loans from different lenders.

The good news is that you don't have to face this task alone; a real estate agent can walk you through the whole process and make it easy.