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Understanding Financing

The following terms are commonly used in the mortgage loan process.

Credit Report

It does not cost much to have your credit score checked and obtain a credit report, usually under $50. With your permission the lender will order a review of your outstanding loans and your repayment history from an independent credit agency. However, it is important to know that each time your credit score is checked, your score is affected. Therefore, use judicious care in deciding how often it is checked.

Application/Processing Fee

Once your credit is checked and you are eligible to proceed for mortgage financing, you may apply for a loan. The application fee is what the lender will charge for the work needed to evaluate your ability to repay the loan.  Some lenders will credit this back to you upon closing.

What is APR?

The APR, or annual percentage rate, is the sum total of all costs for borrowing money for a mortgage. It is expressed as an interest rate for an entire year.

For example: After fees such as Origination Points, Mortgage Insurance and Underwriting, the original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed, and the principal payments are calculated based on the length of the loan term (for example 15, 20, or 30 years).

Indexes

The interest rates on variable loans (ARMs) readjust periodically based on changes in an index. Typical indexes include the Federal Funds Rate, Treasury Bill and London Interbank Offer Rate (LIBOR) The adjustment from changes in these indexes may increase or decrease.

Points

When mortgage companies are competing by offering lower interest rates, they may charge you a one-time pre-paid interest payment calculated as a percentage of the loan. Called “points”, they may range from 0.25% to 2% of the loan balance, and are usually paid up front. Points are tax-deductible so consult with your tax advisor if you are interested. To some buyers it is advantageous to pay a slightly higher one-time fee upfront to ensure a lower annual interest rate.

Appraisal Cost

To guarantee that their investment—the property they are loaning you money to buy—is a properly valued one, lenders hire experienced, often independent, appraisers to evaluate the property’s purchase price, condition and size. They do this by comparing similar recently-sold properties. This helps ensure that the purchase price is not too high, and gives the lenders more confidence that their investment, and thus yours as well, is a worthy one. The appraisal costs vary depending on the property, type of appraisal, and region. Once you decide on a lender, ask what the appraisal cost is.

Miscellaneous Fees

There are many details to execute when getting a mortgage, expect to see various charges incurred in the processing of your loan which might include county recording fees, courier, and notary fees.

Prepayment Penalties

A prepayment penalty is one that is agreed upon before a borrower requests and signs a mortgage loan application. Because the lenders ideally would like a long term fiscal relationship with a borrower, they may issue a prepayment penalty for mortgages paid in full before their final date. These may vary widely, so be sure you know in advance if your lender will charge a penalty if you refinance or sell, and the certain period during which the penalties apply.

...Read about [Pre-Approval Letters]

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