Making Sense of Mortgage Terminology

When you’re in the market for a new home, finding the right mortgage can be almost as important as finding the right Grand Rapids real estate agent. (Almost!) Since most people only shop for a mortgage a few times in their life, it’s not always easy to know where to start. Having a quick review of a few key mortgage concepts can help you find or negotiate the best mortgage possible.

Fixed Rate Mortgage or Adjustable Rate Mortgage (ARM) – A fixed rate mortgage has a set rate of interest for a certain period of time, generally 15 or 30 years. An ARM has a fixed rate of interest for a certain number of years (maybe 2 or 3), and then the interest can vary (usually increasing) after the initial term is up. Other types of mortgages are possible.

Closing Costs – Closing costs, or the amount due at the time the loan closes, might include loan origination fees, escrow payments, title insurance, attorney fees, and discount points paid to lower your loan's interest rate. Some of these costs may be negotiable, particularly the fees charged for services provided by lending institution, including administration fees, application fees, document preparation, and loan processing fees.

Private Mortgage Insurance (PMI) – Private mortgage insurance is required for borrowers who do not put down 20% on their home. The borrower pays PMI to protect the bank if the borrower defaults on the loan.

Title Insurance – Title insurance is required to protect both the buyer and the seller against any legal problems with the home’s title. It basically affirms that a property owner has the legal right to transfer a home’s title to the seller, so if a problem occurs, the title company has to pay any legal fees to correct the situation.

Points – Points are a fee paid to the lender up front at closing. One point equals one percent of the loan amount (not the total purchase price of the home). There are two types of points that can be applied to a home mortgage. Discount points (or prepaid interest) are used to reduce the loan's interest rate, and are often tax deductible. Origination points may be added to cover the expenses associated with processing a loan, and may or may not be tax deductible. If you’re not sure whether to pay points, you can use a comparison calculator, because it may or may not make sense depending on how long you expect to be in the home or whether you plan to refinance.

Annual Percentage Rate (APR) – The APR includes the interest rate for the whole year, not just for a month. You can think of it as the annual cost of the loan, because it includes interest as well as other charges or fees like mortgage insurance, most closing costs, discounts points, and loan origination fees, and more accurately reflects the total cost of the loan. The APR is often considered a good way of comparing loans.

Mortgages have a language all their own, but, with knowledge of a few key terms, you can begin to compare and negotiate. To find and negotiate on the home itself, you need a Grand Rapids real estate agent who is well versed in the market and responsive to your needs. Contact The Sprich Group when you’re ready to find the right home for you.

Photo: Colin