When you begin the journey to purchase your first home, securing a mortgage is likely on your to-do list. Navigating the mortgage process for the first time can feel like learning a new language. To help you get started, here are six essential mortgage terms you need to know. Understanding these, especially the last one, will guide you smoothly towards closing.
Down Payment
A down payment is the initial amount of money you pay upfront to purchase a home. Typically, lenders require a down payment of 20% of the home’s purchase price to secure a mortgage. However, some government programs like VA (Veterans Affairs) and FHA (Federal Housing Authority) loans offer lower down payment options, sometimes as low as 0% and 3%, respectively. Additionally, an earnest money deposit, which acts as a “good faith” payment to show your commitment to buying the home, is often part of the down payment process. This deposit is held in escrow and applied to your closing costs or down payment.
APR (Annual Percentage Rate)
The Annual Percentage Rate (APR) reflects the total cost of borrowing money, including the mortgage interest rate and additional fees such as broker fees, discount points, and some closing costs. Unlike the interest rate, which only shows the cost of borrowing the principal loan amount, the APR provides a more comprehensive picture of the yearly cost of your mortgage.
PMI (Private Mortgage Insurance)
Private Mortgage Insurance (PMI) is typically required if your down payment is less than 20% of the home’s purchase price. PMI protects the lender if you fail to make your mortgage payments. The cost of PMI is included in your monthly mortgage payment and covers a portion of the mortgage balance if you default on the loan.
“Clear to Close”
“Clear to Close” is a crucial milestone in the mortgage process, indicating that the underwriter has reviewed and approved all necessary documents. At this stage, you’ll receive a Closing Disclosure (CD) outlining the final loan terms and a breakdown of costs and fees. You’ll also get an ALTA Settlement Statement detailing where the funds go and how much you need to bring to the closing.
Appraisal
An appraisal is an objective evaluation of a home’s value conducted by a licensed professional. Lenders use the appraisal to determine the Loan-to-Value (LTV) ratio. The appraisal considers factors such as property inspection, upgrades, and recent sales of similar homes in the area. If the appraised value is lower than the purchase price, the transaction may need to be renegotiated.
Loan Estimate (LE)
A Loan Estimate (LE) is a form you receive after applying for a mortgage, detailing key information about your loan. The LE includes the estimated interest rate, projected monthly mortgage payment, and total closing costs. The government mandates that all borrowers receive an LE to ensure transparency. If any information differs from what you expected, ask your lender for clarification.
If you’re a seasoned homebuyer, we’d love to hear your thoughts on our list. Did we miss any terms? Share your insights in the comments or on social media. If you found this helpful, feel free to share it with a friend who might benefit!
