5 Common Mortgage Misnomers and Misconceptions
Sometimes, it's hard to know exactly what a lender is referring to because so many mortgage terms sound similar. However, these terms usually mean drastically different things within the mortgage industry, and many are not related to each other in a technical sense. Here, we'll clear up some of the most common mortgage misnomers and misconceptions:
1. APR vs. Interest Rate
APR (annual percentage rate) is a calculation of your interest charge from the loan's closing costs and the effect of those interest payments until maturity. The interest rate is what your monthly payments are based on. Your APR will always be higher than your interest rate.
2. PMI vs. MIP
PMI (private mortgage insurance) is what you pay to a lender to avoid loan failure on a conventional loan. If you put down less than 20% on your home, you will pay PMI until you meet 20% of your conventional loan. If you put down less than 20% on an FHA loan, you will pay PMI for the lifetime of the loan.
MIP (mortgage insurance premium) is the FHA mortgage insurance premium. This premium is paid in two ways: upfront (1.75% of the loan amount) and annually through monthly installments (1.25% of the loan amount). These funds are utilized to insure your loan.
The main difference between the two is that PMI is insured by a mortgage company whereas MIP goes to HUD, which is completely self-insured.
3. 203K vs. 203B
These two loan programs are typically confused because they sound so similar. A 203B is a classic FHA loan program, whereas a 203K is an FHA Rehab Loan Program. As an example, you would take out a 203B loan if you wanted to purchase a house, whereas you would take out a 203K loan if you wanted to purchase a house and use part of the loan to renovate.
4. DU Refi Plus vs. Open Access vs. HARP
These are all HARP programs for different Government Sponsored Entities. DU Refi Plus is the Fannie Mae HARP Program, Open Access is the Freddie Mac HARP Program and HARP is the generic term for the Home Affordable Refinance Program.
5. Investment Property vs. Second Home
An investment property is a home that requires at least a 20% down payment. You need to be prepared to pay higher rates on your investment property but you can charge rent from other people.
A second home requires a 30% down payment and has a 1.75% loan cost adjustment. You can only consider a house a second home if it's 50 miles away from your primary residence and you can't charge rent.