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Understanding Mortgage Terminology

May 18, 2010 by CindyTichy · Leave a Comment

During the homebuying process,most homebuyers will seek out some type of mortgage financing. First time homebuyers often find the loan process confusing, but even repeat homebuyers can find themselves asking questions. There are many different terms involved with mortgages and financing and it is a good idea that you become familiar with them. Below are some of the common terminology used so you can start to do your research.

Adjustable-Rate Mortgage (ARM)
A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes

Annual Percentage Rate (APR): The APR for your home loan is an annual cost that includes the interest rate quoted by your mortgage company plus additional home loan costs such as origination fees and points. Required by law, this amount is to be disclosed to the homeowner by the lender under the federal Truth in Lending Act. This amount includes up-front costs paid to obtain the loan but does not include the PMI, title insurance, appraisal, and credit report.

Closing Costs: These are the expenses aside from the price of the property that are incurred by buyers and sellers when transferring ownership of a property. These costs include origination fees, property taxes, charges for title insurance, escrow costs, appraisal fees etc. Many times these costs are shared by the buyer and the seller.

Escrow: During the home loan process, a neutral third party known as Escrow holds documents and money (including earnest money deposits) for safekeeping until the real estate transaction is complete.

Points: The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount. This means that, to lower your interest rate by one point on a $300,000 mortgage, you’ll need to pay an additional $3,000 at closing.

Private Mortgage Insurance (PMI): If you are purchasing a home and you do not have a the traditional 20 percent down payment, lenders will require you to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.

Title Insurance: This type of insurance protects both the buyer and the seller against legal issues that may arise with a home’s title. If a problem occurs, the title company pays the associated legal fees to correct the situation.

There are many different terms out there that will come up when you buy a home and apply for a loan. If you are ever confused or have any questions about a particular term or contract be sure to ask your realtor or real estate attorney for clarification before signing any legal documents.

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