Don’t be intimidated
by the jargon used in financing. Here are
a number of key terms you’ll see frequently
in your process.
• Credit report.
Request your lender to order one from a
third party credit agency such as Equifax or
Experian. A credit report should contain
information on all your outstanding loans
and repayment history, and will typically
cost less than fifty dollars.
• Application/processing fee.
This is the lender’s fee for the assessment
of your capacity for repayment as a borrower
and will usually be charged upon closing
of the loan. Expect a price tag of a couple
of hundred dollars.
• Annual percentage rate (APR).
The APR expresses the sum total of all your
borrowing costs as a percentage interest
rate charged on the loan balance.
Example: After fees, the original
interest rate quote of 5.875% might
work out to a 6% APR loan, where the
interest costs about $6,000 per year
for every $100,000 borrowed, and the
principal payments are calculated based
on the length of the loan term (for
example 15, 20, or 30 years).
Changes in indexes such as the Federal Funds
Rate and the Treasury Bill are used to periodically
readjust the interest rates in adjustable
rate mortgages (ARMs).
When mortgage companies are competing by
offering lower interest rates, they may
charge you a “point,” a one-time
pre-paid interest fee, calculated as a percentage
of the loan. Points are considered part
of the cost of credit to the borrower, and
part of the investment return to the lender.
They may range from 0.25% to 2% of the loan
balance, and are usually paid up front.
• Appraisal cost.
This is the fee given to an independent
appraiser who may be hired by your lender
to evaluate the property’s purchase
price, condition and size in relation to
similar recent neighborhood sales. This
is useful to the lender because it ensures
repayment in case the borrower defaults,
forcing them to sell the property.
• Miscellaneous fees.
Various costs will be incurred during the
processing of your loan request, such as
notary, courier, and county recording fees.
• Pre-payment penalties.
A prepayment penalty is a provision of your
contract with the lender that states that
in the event you pay off the loan entirely,
you will pay a penalty. Penalties are usually
expressed as a percent of the outstanding
balance at time of prepayment, or a specified
number of months of interest. They often
decline or disappear altogether with the
passage of time.