Mortgage Terms To Know
Closing Costs
These are costs that the buyer of a home has to pay at the time of purchase. Closing costs usually include an appraisal fee, title search fee and lawyer’s or title company’s fees. They may also include "points" and other fees such as one-year homeowner’s insurance and private mortgages insurance, if required. Closing costs are in addition to your down payment and vary slightly from lender to lender.
Escrow
These are fees that a neutral third party charges to hold the funds and documents that change hands during the buying and selling process. An escrow officer sees that items in the purchase contract are carried out and appropriate parties are paid.
Homeowner’s Insurance
Lenders require home buyers to purchase homeowner’s insurance. This protects you against fire and in some areas floods as well. Most policies also protect the homeowner against theft and liability should someone be injured on the property.
Points
These are finance charges paid to the lender as part of the closing costs. Each point equal 1% of your total mortgage loan. Points can be negotiable and are sometimes tied to your interest rate. Paying more points to get a lower interest rate may be a good idea if you plan to take a long-term loan.
Prepayment
By making early or extra payments toward the principal (amount borrowed), prepayment can shorten the length of your mortgage and thus lower your total interest. However, lenders may charge a penalty if you pay off the mortgage very quickly, usually in the first few years. Be sure to ask about prepayment conditions in your mortgage and read all the documents.
Private Mortgage Insurance
This is insurance the buyer carries to guarantee that the lender is paid off if the buyer defaults (fails to pay) on a mortgage. This is different from homeowner’s insurance. It is generally required for all mortgages with less than a 20% down payment. The exact amount (usually a few hundred dollars) depends on the amount of the loan and the size of the down payment.
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