Common Mortgage Terms

 

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.)

 

Principal and Interest

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. 

Escrow

This 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.     

Points

One 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.

Down Payment

This 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.

Closing Costs

These 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 situation.

Annual Percentage Rate (APR)

The 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)

This 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 details.)

 

 

 

 

Financial Security Consultants, Inc. provides mortgage services to credit union members and their families. We also provide a variety of consulting services for credit union professionals.

Contact us to see how we can be of service to you!

Financial Security Consultants.  Specializing in Mortgage Services for Credit Union Members
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