Unpacking the lingo is the first part of the home purchase process. Understanding the terms, acronyms and other confusing jargon will help you better negotiate the terms of your mortgage.
Buying a home is the single most expensive purchase most people will accomplish in a lifespan. Here are ten terms explained as simple as possible:
It’s all in the family – Freddie Mac, Fannie Mae and Ginnie Mae
This trio was formed by the federal government to support a national market for mortgage credit. They are separate entities with the same objective to make it easier for mortgage lenders to sell mortgages to investors by promising those in mortgage-backed securities that they will receive their payments of interest and principal in a timely manner in case borrowers default on their payments.
Ginnie Mae provides funding for all government-insured or government-guaranteed mortgage loans.
Seasoning
The down payment is the amount you pay upfront towards the purchase of your house. The conventional down payment is 20% although there are loans which allow for 3.5%, 5% or 10%. The down payment represents the buyer’s guarantee that he is a serious buyer. If you are a first-time homebuyer, you should be aware that lenders scrutinize the “seasoning” of the down payment. They want to see the funds have been in your bank account for 60 to 90 days.
Points
Points are negotiable. Your mortgage lenders will discuss points quite often, especially as you get closer to completing the terms of your mortgage. This refers to the percentage points of the loan amount that a lender charges to a borrower for a loan.
APR
This is the annual percentage rate. Many homeowners focus only on the interest rate or the monthly payment. The APR gives you a better idea of the true cost of how much you are borrowing, which includes all the fees and points for the loan.
Origination Fee
This is a fee that is charged by a lender to process a loan. The origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge. The average origination fee, also referred to as points is 1% or 1 point and is negotiable. This fee is mainly used to pay commissions to sales people.
It is possible that you can get a mortgage with no origination fee. This means that the broker will get paid by the bank, but you often end up paying a higher interest rate for the mortgage.
Discount Points
This is the prepaid interest you pay to buy down your interest rate, and one point equals 1% of the loan value. Buying down your interest rate can have a big impact on your monthly payment and the amount of interest you pay over the life of a loan.
Closing Costs
These are all of the costs incurred for the loan and include everything from origination fees, title fees, appraisal fees, attorney’s fees and underwriting fees. The typical closing costs are usually 2% to 5% of the loan value.
Since most people finance their closing costs, it adds to the loan amount and can increase the monthly payment. In some instances, the seller of the property may contribute to the closing costs on the transaction. This is a request submitted when your offer is presented by your Realtor.
The Closing
A closing is the last step and occurs when you are ready to sign the mortgage documents. This is when the title to the property changes hands. Be prepared to sign dozens of pages of documents before you are handed a key to your new home.