Deciphering What Your Lender Says
Posted by Lisa Udy on Tuesday, January 10th, 2012 at 2:05pm.
Does your mortgage lender sound like he’s speaking a foreign
language? Getting a mortgage can be difficult, especially since there is a lot
of paperwork involved.
You will have lots of documents to read and then sign, and if you are like the average homebuyer, you will run into a lot of different terms that you may not have heard before.
Instead of just nodding your head and signing on the dotted line, it is important that you gain a better understanding of what your lender is saying (and what you are signing), or you may end up making costly mistakes on the biggest purchase of your life.
Don’t get your pen out just yet! You need to learn some of the basic mortgage language and gain some general knowledge about terms like jumbo loans and fixed rate mortgages before you make anything official.
Some common terms to know when you are buying a home include:
- Loan origination fees. Loan application processing fees are sometimes also referred to as points and are equal to one percent of your loan amount. It is important to note that these points are not the same as mortgage points, described below.
- Mortgage points. Mortgage points are advance interest or fees that are paid in before the loan closes. By taking points, the borrower enjoys lower interest rates for a particular part of the loan, or sometimes even for the life of the entire loan. Mortgage points are also referred to as discount points, and are based on one percent of the loan amount. On a $300K mortgage, one point costs $3K.
- Jumbo loan. A jumbo loan is called so because it is bigger than current limits that are backed by Freddie Mac and Fannie Mae. Jumbo loans are risky loans in your lenders eyes, and they typically have a higher rate of interest than other loans.
- Interest-only mortgage. This type of mortgage allows the buyer to pay only the interest on the mortgage during the initial loan period. After that time, which is usually a year or less, payment is also made toward the principal, and thus, makes the minimum payment amount go up.
- Lock-in period. The period of time during which a buyer cannot pay off their home loan sooner than stated without incurring penalties. This ensures the lender that they will make a certain amount on the loan. This term can also refer to locked in rates, where the bank agrees to write the loan at a particular rate of interest for a specific time period ranging from thirty days to ninety days.
- Mortgage insurance. Mortgage insurance protects the bank in the event that the borrower should default on the mortgage loan. This insurance is usually obtained through the FHA, although it can also be obtained through a private insurance issuer. For homeowners who borrow more than 80% of the market value on their homes, mortgage insurance is usually a requirement. If you need to purchase private mortgage insurance, which is also known as PMI, you can cancel it once you have paid the loan down to where you have twenty percent equity in the home.
These are just some of the terms that you may hear your lender or real estate agent throwing around at you. Now that you are armed with the information above, you can decipher the jargon and understand what your lender is really saying.
This guest blog was supplied by Vickie Nagy a Real Estate San Ramon CA agent. If you're interested in buying a luxury estate in California, you can see some fantastic homes in Danville, CA on Vickie's site. You may also enjoy viewing real estate in Dublin, CA for more options.
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Great article - arming yourself with as much information as possible is always the best strategy. It's certainly no different when obtaining a mortgage for your home. Read the fine print and always ask for options. A good lender will give you a few to choose from to determine which product is best for you...it's not always about the best rate!
Posted on Thursday, January 12th, 2012 at 5:20pm.