Demystifying Mortgage Terms: 9 Terms to Understand Your Lender
July 26, 2012
At times it can get confusing when you hear terms tossed around at the mortgage stage of the home shopping experience. For some it can be enough to make them run in the other direction in confusion. Ideal Homes has created this mini guide designed to help you learn the lingo when purchasing your new home. Closing Costs - These are the costs that both the buyer and the seller incur when transferring ownership of a property. These costs can include an origination fee, attorney's fee, taxes, escrow payments, title insurance, discount points and more. Origination Fee - This is charged by the mortgage lender in order to evaluate and prepare your loan. Things that your lender can roll into this cost include attorney's fees, document preparation fees and notary's fees as well as other similar line items. Escrow - This is an account with a neutral third party that holds all documents and money in a real estate transaction until all conditions are met to complete the sale and transfer the purchase. After the real estate transaction, a lender may require an escrow account be set up to collect a monthly portion designated for property taxes, insurance and other designated fees until payments are due. Good Faith Estimate, or GFE - A lender must provide a prospective homeowner a written estimate of expected closing costs with in three days of making a mortgage application on a home. It is required by law to be as accurate as possible. Buy-down - This is a one-time charge that can be negotiated with the lender to reduce the interest rate over the life of the loan. The increments used to reduce the rate are called points or discount points. Points - These are the increments used in a reduce the percentage rate of the loan. One point equals 1% of the loan amount. If the loan is $200,000 then 1 point will cost $2000. Do not confuse a point with a percentage point. They are not equal. Private Mortgage Insurance, or PMI - This is an insurance policy that protects against loan defaults and allows the lender to recoup losses in the case of a foreclosure. PMI is usually required if the down payment is less than 20% of the sales price. The coverage is paid in monthly installments and terminates once the homeowner builds up 20% equity in the property. Homeowner's Insurance - A lender will require that you have this coverage, sometimes called hazard insurance, secured on your property upon settlement. This insures the lender's investment in your home in the case of fire, vandalism, and other circumstances, which could destroy the house. Make sure your policy also covers the contents of your home. In the case of condominium ownership, hazard insurance may be part of the monthly condominium fees. You should still seek insurance for the contents of your home. Title Insurance - This is a policy that insures the seller has clear title to the property and the ability to legally transfer the title to someone else. This type of policy will protect the lender, the buyer or both. If a problem arises the insurer pays any legal damages. Hopefully this begins to demystify the mortgage terminology and allow you to get comfortable with the idea of owning your own home.