Even if you knew the meaning of every word on our first list of 11 Mortgage Terms Homebuyers Should Know, you may still find yourself looking up definitions while shopping for a home.
Let’s jump in and explain ten more important terms homebuyers should know.
- Unless you work in the industry, you probably won’t know the meaning of every word you hear.
- If you don’t understand what your lender is saying, ask them for clarity.
- Call us anytime if you have a mortgage question.
Amortization or amortization schedule/table
Amortization is the process of gradually paying off a debt. Your lender can give you an amortization schedule (or amortization table) which shows how much you’ll pay in principal and interest every month for the life of the loan. Most mortgages fully amortize, but some don’t, and money is still owed after all payments have been made. An amortization table is handy for buyers who want to see how much interest they’ll pay over the life of the loan, and how making additional payments towards the principal reduces that number. Ask your lender to provide one, or you can use our online amortization calculator.
After an offer is accepted, the lender will oftentimes order an appraisal of the home being purchased. The appraiser walks through the home, inside and out, and calculates what the home is worth based on what they see, along with sale prices of similar homes in the area. This is done to protect the lender from loaning the buyer more money than the home is worth. The buyer is responsible for paying the appraisal fee, which is usually between $300 – $450. If a home has recently been appraised, the lender can waive a new appraisal, although this is always at the lender’s discretion and they aren’t required to do it.
It’s wise to schedule a home inspection as soon as possible after an offer is accepted so there is time to negotiate any necessary repairs with the seller before closing. Buyers are responsible for paying for the inspection, and payment is made at the time the service is performed (it’s not part of the closing costs). Be sure to research the inspector, and find out what is being inspected. Radon testing, termite inspection, mold inspection, foundation inspection, and sometimes additional structures like sheds or barns will be inspected for an additional fee. Make sure the inspector provides photos for anything that needs to be repaired, as they may be needed to back up the buyer’s contingency to the seller, and will also be useful to ensure repairs are completed.
Discount points or mortgage points are optional fees a buyer can pay up front in exchange for an interest rate reduction. One point usually costs 1% of the home’s purchase price, and typically reduces the interest rate by .25% (although this reduction can vary between lenders). For example, say a buyer is considering a 30-year fixed rate mortgage at an interest rate of 5.5%, for a home that costs $350,000. One point would cost the buyer $3,500 at closing, but the new interest rate would be 5.25%. This would reduce the monthly payment by $38, and there would be a lifetime savings on interest of $13,466 if they stayed in the home for the entire term. Keep in mind that it takes time to break even on the investment of paying points. In this example it would take seven years and nine months of saving $38/mo to recoup the $3,500 spent on the lower rate. A homeowner who plans to sell their home or refinance before that break even point might be better off not purchasing points. Your lender can help you calculate how much you can save with points also known as “buying down the rate”, or if you prefer to crunch the numbers yourself you can use an online amortization calculator.
This is a standardized three page form that the Consumer Financial Protection Bureau (CFPB) requires lenders to provide within three business days of receiving a mortgage application. It outlines the estimated interest rate, monthly payment, closing costs, cost of taxes and insurance, as well as special features of the mortgage. Special features could include how interest rates and payments may change over time, or if there are any prepayment penalties for paying off the loan early. A loan estimate is not a guarantee for a mortgage, but a standard form written in plain English that all lenders use which helps buyers understand their options. Lenders can only increase what is quoted on the loan estimate under certain circumstances, like if the appraisal comes in lower than expected, or the buyer changes the loan type, reduces their down payment, or their credit score changes.
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A closing disclosure is a five-page form the lender is required to give to the buyer three days before the loan closes. It shows all the final details about the chosen mortgage loan, including the loan term, loan type, interest rate, projected monthly payments, and how much will be paid in fees and closing costs to obtain the mortgage. It’s designed to protect buyers so they fully understand the details of their mortgage before closing. The CFPB has a sample closing disclosure and interactive explanation on their website. If anything looks different on the closing disclosure from what was expected, contact the lender immediately.
This fee covers the lender’s costs for issuing the loan. It typically covers administrative costs like processing the application, underwriting, funding the loan, and other time spent on various paperwork. Origination fees are paid at closing, and as such buyers can ask the seller to pay part of them, or ask the lender to roll them into the mortgage.
A finance charge is the total amount of interest and loan charges the buyer will pay over the life of the mortgage. The finance charge includes the origination fee, discount points, mortgage insurance, and any other charges from the lender. You’ll find the finance charge explained on page five of the closing disclosure. The amount shown assumes the buyer is making on-time monthly payments and keeps the home for the duration of the loan.
The mortgage servicer is the company that manages the loan. They process loan payments, send out monthly mortgage statements, manage the escrow account, and answer questions borrowers have about their mortgage. The servicer is not always the company who issued the mortgage. Servicers can change when mortgages are sold on the secondary market, but the good news with Member Advantage Mortgage is that even if your mortgage is sold — the credit union where the loan originated will still act as your servicer. That creates less headaches and hassles for the borrower.
A short sale happens when a lender takes a loss on a home because it is sold for less than what is owed on the mortgage. The lender sells the home short of what they’re owed, hence the term “short sale”. Sometimes the seller has to make up the difference between what the home sells for and how much the lender was owed, but that’s determined on a case by case basis. Short sales can happen when the value of a home drops, the home owner is having a hard time making payments, they have defaulted or are close to defaulting on the mortgage, and have no other assets they can sell to pay back the mortgage. While it’s not a great option for the lender, most lenders would rather sell a home for a small loss instead of foreclosing on the home. Buyers who are considering a short sale should be aware that the homeowner doesn’t receive anything from the sale, and the lender is losing money by agreeing to sell the home at the shorted price. Low-ball offers, or asking the lender to waive any fees or closing costs will likely not be accepted. It can also take a long time for the loan to close, so be ready to wait it out when purchasing a short sale.