Understanding Mortgage Terms: Initial Interest Rate, Margin and Credit Score

The mortgage industry has a language of its own. Understanding mortgage terms is the important so here is a discussion of initial interest rate, margin and credit score subjects.

Understanding Mortgage Terms: Initial Interest Rate, Margin and Credit Score

Apply for a loan for a house and you will be entering a whole new world. The terminology used in the mortgage industry is such that you might as well be on another planet. Some terms mean essentially what they sound like, but many do not. Taking the time to understand the terminology can go a long way to rescuing you from confusion.

Initial interest rate is a term that many borrowers hear and read, but do not really understand. In the past, mortgages typically came with a fixed interest rate that remained the same throughout the length of the loan. While these loans still exist, an entirely new batch of loans has become very popular. There are so many variations that it is difficult to summarize them, but many come with an initial interest rate. This term is also known as a teaser rate. Essentially, it is a low interest rate used to get you into the loan and home. While this may sound great at first glance, many people rue the day they applied for such a loan. As the name suggest, the interest rate changes after an initial period. It goes up! If the increase is significant, you can quickly run into a situation where you cannot afford to make the monthly payments. When considering these kinds of loans, make sure you know and can afford the "real" interest rate.

Margin is another term most borrowers do not understand. Frankly, they usually do not care. Margin is a term that means the same thing with any business. It refers to the percentage a lender is going to charge on top of an interest rate as a fee for loaning you the money in question. In short, we are talking about the profit for the lender. As you might imagine, lenders are loath to reduce the margin on a loan, but at least you know what it is.

Credit score is a term that most borrowers are intimately familiar with, but don't really understand. A credit score is not what you see on a credit report from TransUnion, Equifax or Experian. Instead, it is a compilation of your credit pursuant to a formula created by the fine people at Fair, Isaacs and Company. The number the formula kicks out is your credit score and is also known as a "FICO" score after the company. Before you ever apply for a mortgage, you should review your credit reports and aggressively attack any negative marks. It can make all the difference in the world on your credit score and getting a better interest rate. In simple terms, the lower the interest rate, the more money you will save on your interest payments.

The mortgage industry is rife with bizarre terms. Getting a grasp on them will give you a head start in getting the loan you want.

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