When you begin to investigate mortgage financing, you'll hear a lot
of new terms. Feel free
to ask our loan officers to explain any terms which are not familiar
to you. It's important
that you clearly understand these terms so that you can make an informed
decision. Some of the most
common terms you'll hear are explained below. (Click on Mortgage Product Types for explanations
of the various mortgage types offered.)
This is the
portion of your monthly mortgage payment which is used to repay your
loan. The principal portion
reduces your loan balance, and the interest portion pays the accrued
interest on your loan.
is the portion of your monthly mortgage payment which is used to pay
property taxes and homeowner's insurance. It may also be used to pay ground
rent and private mortgage insurance when applicable. Some lenders require you to pay
into an escrow account to cover these expenses; some do not maintain
escrow accounts or may allow you to choose to pay these expenses separately
if you wish.
point equals one percent of the loan amount. It's an amount of money that you
pay when you receive your mortgage in order to obtain a lower interest
rate. Paying points to
reduce your interest rate may or may not be in your best interest. If you are considering paying points,
have your loan officer calculate your rate and closing costs with
and without points, then see how many months or years it will take you to recoup points
paid in actual interest savings.
is the amount of your home purchase price which cannot come from a
mortgage loan. Generally,
down payment funds come from money you have saved. Sometimes, you can use a gift from
a relative or a loan against a retirement plan or existing home for
your down payment. Down
payment requirements vary depending on the mortgage program you choose.
are funds you pay to cover the expenses associated with getting a
mortgage. Closing costs include such items as state and county transfer
taxes and recordation fees, attorney's fees, and the cost of
appraising your home and obtaining a credit report.
Closing costs can vary based on the lender's fees, the loan
program, and the attorney used to conduct settlement. When you apply for your mortgage,
the lender is required to provide a breakdown of estimated closing
costs (called a Good Faith Estimate) within three days of application
so that you know what to expect at settlement.
On a purchase, payment of closing costs may be split between
you and the seller. On
a refinance, closing costs can often be included in the new loan amount.
Ask your loan officer to estimate closing costs for your particular
Annual Percentage Rate (APR)
annual percentage rate is different from your note rate (the interest
rate you see on most of your loan documents) because the annual percentage
rate calculation treats certain types of mortgage-related fees and
closing costs as if they were interest you paid. The annual percentage rate is shown
on a disclosure you receive within three days of application, and
again at settlement, called the Truth-In-Lending disclosure. While the concept can be a confusing
one, the purpose of the Annual Percentage Rate calculation is to allow
you to compare mortgages with different rates and fees to see which
is actually the best deal overall.
While other factors such as reputation and service should also
impact your choice of a mortgage lender, comparing annual percentage
rates can be a good way to narrow your mortgage choices.
Private Mortgage Insurance (PMI or MI)
is an insurance policy which covers the lender (not you) in the event
that you do not make your mortgage payments, the loan goes to foreclosure
sale, and the sales price is less than your mortgage balance. Lenders generally require mortgage
insurance on a conventional or jumbo loan any time you are borrowing
more than 80% of the purchase price or what the house is worth (whichever
is lower). The mortgage
insurance allows the lender to lend you a higher percentage of the
purchase price or home value without a great deal of additional risk. An initial mortgage insurance premium
is generally collected at time of settlement. Mortgage insurance is also usually
part of your monthly escrow payment.
On a conventional or jumbo loan, you may be able to avoid paying
mortgage insurance by making a larger down payment, or by splitting
your mortgage up into a first mortgage and an accompanying second
mortgage. Ask your loan
officer to calculate payments and costs to see if this would be advantageous
to you. (On an FHA mortgage,
different and more complex requirements apply, and there is little
or no flexibility in terms of avoiding the mortgage insurance. Your loan officer can give you more