The mortgage industry has its own unique language which includes many acronyms and sometimes confusing jargon. It’s important to know and understand the terminology to help negotiate the terms of your mortgage and hopefully save money.
Here are seven terms that will help you prepare as you begin one of the largest commitments in your lifetime.
1. Freddie Mac, Fannie Mae, and Ginnie Mae
The federal government created these to support a national market for mortgage credit. They do not interact directly with homebuyers. Instead, they make it easier for mortgage lenders to sell mortgages to investors by assuring interest and principal payments will be received in a timely manner, in case borrowers default on their payments.
2. Down Payment
This is the amount you pay upfront towards the purchase of your new home. A typical amount is 20%, but there are loan options which allow for as little as 0-5%. Funds need to be in your bank account for 60 to 90 days.
This refers interest paid to the lender upfront at closing in order to reduce the rate. Each point equals 1 percent of the loan amount. For example, if you are charged 1 point on a $200,000 loan, you would owe $2,000 at closing.
APR stands for Annual Percentage Rate. It is the annual cost of a loan, expressed as a yearly rate. APR takes into account interest, discount points, lender fees and mortgage insurance, so it will be slightly higher than the interest rate on the loan.
5. Origination Fee
This is a fee that a lender charges for evaluating and processing the loan. This fee shows up on your GFE (Good Faith Estimate). The origination fees can also be referred to as origination points.
6. Closing Costs
These are expenses paid by you and/or the seller during the closing. These can include loan origination fee, discount points, attorney’s fees, title insurance, appraisals, etc. The typical closing costs are usually 2% to 5% of the loan value. A lot of people finance their closing costs which adds to the loan amount and can increase the monthly payment.
7. The Closing
A closing is the last step before you sign the mortgage documents. It typically takes place at a title company with the buyer, seller and lender or their agents. During the closing, property and funds legally change hands. Be prepared to sign several documents before you receive the keys to your new home.