Your mortgage loan is typically the largest purchase you will make. This fact aside, many homeowners are very uncomfortable when it comes to dealing with mortgages and mortgage refinancing. It helps to familiarize yourself with the terminology used when dealing with mortgages. This makes it much easier to do your homework when shopping for a mortgage loan; doing your homework will ensure you get the best deal for your money.
Basic mortgage terminology involves interest rates, closing costs and points.
Interest Rates
When your mortgage lender gives you a loan for your home they are trying to make a profit by charging you for use of their money. This is the interest you pay and mortgage loans are front loaded with interest. Front loaded means in the early part of your mortgage most of your payments will be applied to interest on the loan. If you are in the process of shopping for a mortgage pay close attention to the lock period your lender offers you. The lock period is the amount of time you have to close on the mortgage where the lender guarantees the interest rate you have selected. If you run into problems closing and go over the timeframe for the lock period you could lose that interest rate. Make sure your lender gives you enough time to close, including any unforeseen problems.
Points
Points are basically pre-paid interest on your loan. Like a down payment, you are pre-paying this interest to receive a lower interest rate for your loan. Points are 1 percent of the loan amount. For example on a $200,000 mortgage loan pre-paying 1 point at closing would cost your $2,000. If you can afford to pay at least 3 points at closing time you could significantly lower your interest rate. This is a small price to pay for the amount of interest you will save over the course of your mortgage.
Closing Costs
Closing costs are the out-of-pocket expenses you will have when closing on your mortgage. The costs you will pay at the title company’s closing will depend on the lender and the loan you have selected. Your mortgage lender is required by law to disclose all fees required prior to closing. You should receive a good faith estimate of these expenses from every lender as part of your comparison shopping before choosing a mortgage.
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My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
