Are you looking to buy your first home? Here are 10 mortgage vocabulary words you’ll need to know:
1. Annual percentage rate (APR). APR is a standard method of calculating mortgage costs stated as a yearly rate. It includes interest, mortgage insurance, points and/or credit costs. Since it includes other items, the APR number will be higher than the interest rate.
2. Good faith estimate (GFE). A written estimate of expected closing costs. Lenders must provide it to prospective buyers within three business days of their submitting a mortgage application. Lenders and brokers are required by law to make this estimate as accurate as possible.
3. Closing costs. Expenses that are incurred by buyers and sellers during the transfer of property ownership normally including an origination fee, taxes, escrow payments, attorney’s fee, title insurance and discount points. A good-faith estimate of closing costs must be provided by lenders to prospective buyers.
4. Point. One point equals 1% of a mortgage loan and is factored into the loan’s APR. Some borrowers pay “discount points” to reduce their interest rate; some lenders charge “origination points” to cover loan expenses.
5. Escrow. An account held by a neutral third party with the funds and documents related to a real estate transfer until all of the conditions of the sale are finalized and met. Money for insurance and property taxes is also held in escrow with more added to the escrow account each time a mortgage payment is made.
6. Fixed-rate mortgage. A home loan with a consistent interest rate through its life, usually 30 years or 15 years, but can be 10 or 20 years.
7. Adjustable-rate mortgage (ARM). A loan in which the interest rate can change based upon a standard financial index. Most have a cap as to how much the interest rate can change at each rate adjustment and over the life of the loan.
8. Private mortgage insurance (PMI). Insurance paid by a buyer in monthly installments that protects the lender against loan default, allowing mortgage companies to recover foreclosure costs. PMI is required if the loan to value ratio exceeds 80%. PMI will be automatically terminated when the loan to value ratio reached 78%.
9. Principal. The amount of debt, less interest, that is left to be paid on a loan.
10. Title insurance. Insurance that guarantees an owner has title to a property and is legally allowed to transfer the title to another party. If an issue arises, the insurer will pay any legal damages. Title insurance can protect the lender, the buyer, or both.