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Thursday, 21 November 2019
Agent Resource Center
Agent Resource Center

Mortgage Terms Home Buyers Should Know

Written by Posted On Wednesday, 30 October 2019 08:33

The Most Common Mortgage Terms You Need to Know

For the first time buyer, both the real estate market and mortgage market are a daunting prospect. To many, it is like learning a new language or a new profession. Many buyers would benefit from an app which explains the wonderful language of mortgages and finance. So far, no one has come up with a specialized app and most of us learn things as we go along. And here is a top tip for you - never be afraid to ask lenders mortgage questions. It is essential as a home buyer or seller to have at least a rudimentary grasp of important mortgage terminology.

What are the most common mortgage and finance terms you need to know as you enter the real estate market for the first time? Carry on reading to find out which terms are the most commonly used by real estate agents, brokers, and even your local banker. It's vital to have at least a rudimentary grasp of each of these common mortgage terms.

Appraisal

This is one of the most important terms. The appraisal is, proof of how much the property is worth. It is carried out by a licensed appraisal professional.

The idea is to prove to your bank, or other lenders, the true value of the property so they can "qualify" you to borrow money. Without an appraisal, a lender is not going to lend you the money. Lenders are stricter since the financial crisis back in 2008. Be aware that banks and lenders carry out their own appraisals of which the cost is passed along to consumers.

One of the most frequently asked mortgage questions is what happens if the home does not appraise? When the value comes in lower than the purchase price a few different things can happen including the following:

  • The seller reduces the price to the appraisal amount.
  • The buyer comes up with additional down payment funds to make up the deficiency between the appraised value and agreed upon purchase price.
  • There is a compromise with the seller dropping the price some and the buyer coming up with additional funds.
  • The buyer also has the option of walking away from the sale since the lender will not grant them a mortgage unless the appraisal issue is worked out.

Credit Score

Your credit score is a vital part of procuring a mortgage. Credit scores not only determine whether you can get a loan but what interest rate the lender will charge. It goes without saying that improving your credit score before purchasing a home is of the utmost importance.

Keep in mind that the better the interest rate and mortgage terms you get, the lower the borrowing costs you'll have over the life of the loan.

What Is APR?

You have probably heard of APR. APR stands for annual percentage rate. It is not only used by the mortgage industry. APR is used by the entire financial services industry from credit cards to personal loans.

It gives you the true cost of borrowing money from a bank or other lender. APR calculates the cost of the loan and the cost of securing the loan for its duration. When entering into any kind of financial agreement which involves borrowing, you should make sure you are fully informed of the total cost. Do not only take the interest rate into account.

Also, make sure you are aware of other costs involved such as late payment charges. There are often other costs involved. If you would like to pay off your mortgage early, most lenders will apply some kind of charge. All lenders offer different terms and conditions and you should ensure you fully understand what is on offer before you sign on the dotted line.

Private Mortgage Insurance

When you are putting less than a twenty percent down payment on a conventional mortgage lenders will charge what's known as PMI or private mortgage insurance. As a borrower this is a fee that you pay that protects the lenders interest in the property in the event you default of the loan.

PMI can be quite expensive when you think about the fact that it's a useless fee other than getting you into the home. Once you have twenty percent equity in the property you can ask the lender to terminate the private mortgage insurance. Doing so will save you quite a bit of money.

Clear To Close

This is another term you will hear. Your lender will tell you the mortgage is clear to close. It sounds like great news and it is! The lender has cleared all the hurdles for you to be able to sit at a closing table and take possession of your new property. The clear to close is issued when an underwriter has reviewed and approved all of the documentation. Welcome to the world of significant financial responsibility.

What Are Closing Costs?

Closing costs mean it is time to get the checkbook out. It is an excellent idea to make sure you know what the closing costs are going to be before you go ahead with the mortgage, Some lenders try to "sneak" in costs which are associated with the loan. If you are a little bit savvy, you could possibly negotiate some of the closing costs.

Lenders who are keen to generate new business and often help to pay some of the costs. The most common costs are the appraisal, lawyers fee, recording costs, and origination points. Watch out for your closing costs as they can run from 2 - 5 % of the loan amount.

Closing Disclosure

This is a very important document, which covers all of the finalized details of the mortgage. Read it very carefully and make sure you understand it. In a nutshell, it gives you all of the closing costs and your monthly payment. Make sure that any insurances linked to the mortgage are included in the paperwork if you have purchased insurances from the lender.

There are many other terms you will hear as well, and they are often associated with your financial status. Most mortgage lenders like to talk about your debt to income ratio and the equity in your home.

Once you have completed your purchase, think about ways in which you can increase the equity in your home. Many first time buyers forget about their equity. Home improvements can help you to improve the equity and making extra payments towards your mortgage can help as well.

Mortgage finance is all about seeing your home as an asset and this is something both experienced and new homeowners often forget about that when they cross the threshold of their new home. Try to avoid falling into that category.

Final Thoughts

There are quite a few mortgage terms that can confuse buyers during the home purchase process. It is essential to ask either your mortgage broker or real estate agent when their is any confusion on your part. Never feel bad about being educated during what is probably the largest transaction of your life!

Other Financial/Mortgage Articles Worth Reading

  • Can you buy a home with bad credit - the answer is yes you can. While purchasing a property with less than stellar credit is not ideal, it's possible. In the article at Clever Real Estate Guidance see what you need to know about increasing your credit score.
  • What's the difference between hard and soft money - have you hear the term "hard money loan" and wondered what it meant? In the article at Massachusetts Real Estate News, see how hard money loans differ from standard mortgages.

Use these additional financial resources to make better decisions when you are going to be purchasing a home, especially if it is for the first time.

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Bill Gassett

One of the top RE/MAX agents in New England over the last decade plus. Providing exceptional real estate services to buyers and sellers in the Metrowest Massachusetts area including the following communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

See my real estate website at Maximum Real Estate Exposure - one of the most visited real estate sites in Massachusetts.

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