The Mortgage Process can be confusing. Here’s a Mortgage Glossary to help you understand some basic mortgage jargon
PRE-APPROVAL LETTER: A Pre-Approval Letter is a commitment from your lender that will tell you how much of a home you can afford and the maximum amount of money you are qualified to borrow.
To become Pre-Approved you will need to provide all the documentation of your creditworthiness. An Underwriter will review and verify all your paperwork to determine how much the lender thinks you can afford to borrow,
Having a Pre-Approval Letter in hand before shopping for homes can help you move faster. And with greater confidence in a competitive market.
CREDIT SCORE: A number ranging from 350 – 800 that is based on an analysis of your credit files. Your credit score plays a significant role when applying for a mortgage. The score helps lenders determine the likelihood that you’ll repay future debt payments. The higher your score, the lower the risk of default, the more mortgage program options available to you, including a lower interest rate and lower payments.
MORTGAGE RATE: The interest rate you pay to borrow the money to buy your new home. It’s the cost of the money you pay to borrow the money over a time period. The lower the credit score, the lower the rate, the lower the mortgage payments.
APR: The Annual Percentage Rate is broader measure of your total cost for borrowing the money to buy your new home. The APR includes the not only the total interest rate cost, it also includes points, lender processing fees, and certain other credit charges a borrower is required to pay in order to get the loan Since costs are added to the total interest rate cost, the APR is usually higher than the interest rate.
APPRAISAL: After you make an offer on a home, your lender will order an appraisal of the property to get a professional, unbiased opinion on the value of the house. This is a necessary step in getting your mortgage secured as it validates the worth of house both to you and your lender. The appraised amount is a key factor in determining your mortgage’s Loan-To-Value and confirming to you that you are paying a fair price for the property.
CLOSING COSTS: The costs to complete the real estate transaction. These costs are in addition to the purchase price of the home and are paid at the closing of the transaction. They include points, appraisal cost, taxes legal fees, homeowners insurance, financing fees, and items that must be prepaid or escrowed. Closing costs are generally 2 to 5% of your home purchase price.
DISCOUNT POINTS: A point equals 1% of your loan amount (1 point on a $200,000 loan = $2,000). A point is essentially prepaid interest. You pay an upfront interest payment to lock in a lower interest rate for the term of the loan.
DOWN PAYMENT: The down payment is your equity in the property. It is that portion of the cost of your new home that you pay upfront to secure the purchase of the property. The larger the down payment the greater your share of ownership in the house and the lower the perceived risk by the lender. The lower the risk, the lower the interest rate on your mortgage. The reverse is true too. The smaller the down payment, the greater the risk of default and the higher the interest rate. Down payments are typically 3 to 20% of the purchase price of the home.
ESCROW (After Home Purchase): In Connecticut, borrowers can consider escrow to be a savings account set up by the lender to pay for future taxes and the annual home owners insurance premium.
After the home is purchased, the buyer uses an escrow account to pay property taxes and home insurance charges incurred as a homeowner. The mortgage loan servicer makes these payments for you, and has direct access to the escrow account. Mortgage lenders prefer escrow accounts especially for property tax payments, as they don’t want the property, backed by their mortgage loan, to fall behind in taxes and risk a tax lien on the property. The same thinking applies to homeowner’s insurance, where the lender can’t afford the homeowner to miss payments, and thus risk losing insurance coverage on the property.
For homeowners dealing with an escrow account, a good rule of thumb is to expect to pay two months’ worth of taxes and insurance into the escrow account at closing. Typically, once per year your mortgage lender will review your escrow account to make sure you have sufficient funds in your escrow account to cover property tax and home insurance payments.
PRIVATE MORTGAGE INSURANCE (PMI): Private mortgage insurance, also called PMI, is a type of mortgage insurance you are required to pay for if you are financing more than 80% of the home’s appraised value. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan. PMI is the term commonly used for conventional mortgage. With FHA loans, it is known as the annual Mortgage Insurance Premium (MIP). There is no PMI on VA Loans.
Confused? Let Me help put the pieces of your puzzle together. Call Me @ 860.945.9284 to discuss the right mortgage option for your family and to take advantage of my FREE Mortgage “Jump Start” Pre-Approval service.