LOVELAND – Real estate terminology can be confusing, especially when it comes to mortgages. Many terms aren’t quite clear and some are simply misunderstood. Here are a few important mortgage terms that you should know if you plan on purchasing a home.
Appraised value – An appraisal is a report from a licensed appraiser. Within that report is a specific appraised value, which is essentially the current market value of a property based on recent sales.
Assessed value – Assessed value is often confused with appraised value. Assessed values are what properties are taxed on by the city or town. Since assessed values do not get updated frequently, they should not be used to estimate market value.
PMI – PMI stands for private mortgage insurance. Loans with less than 20% for a down payment will likely have a monthly PMI charge. Some loans also have an up-front mortgage insurance charge as part of closing costs.
Closing costs – Closing costs are fees related to obtaining your home loan. Although the types of fees may be similar from lender to lender, the amounts can vary. Also, buyers often assume that closing costs represent everything that they must pay at closing, but closing costs do not include pre-paid expenses (which are also payable at closing).
Pre-paid expenses – Pre-paid expenses are used to describe money that is collected at closing and placed into an escrow account so that funds are available when payments are due. Home buyers are often required to contribute to an escrow account at closing and each month (as part of the mortgage payment) for real estate taxes and property insurance.
Interest rate – The interest rate is used to calculate your monthly mortgage payment. Rates are applied to the amount of money borrowed.
APR – APR is different from interest rate. APR calculations include closing costs, so it’s a good way to compare mortgage options. Two lenders may offer the same interest rate but their APR may be different because of their closing cost charges.
Points – One point equals one percent of the loan amount. With points, you are essentially paying interest up-front in exchange for a lower interest rate over the life of the loan.
Title insurance – Title insurance is a policy that protects your equity in a home should there be an issue with the title (your ownership rights). You are normally required to purchase lender’s title insurance to protect the lender’s interest. Owner’s title insurance is optional. If purchased, it protects you for as long as you own the property.
Mortgage commitment – A mortgage commitment is a loan approval by a lender indicating that they have cleared all major conditions and are likely able to close the loan. Remaining conditions are typically listed in the approval and should be reviewed carefully. A loan is not guaranteed to close even when a commitment is received.
Clear to close – A clear to close represents full loan approval with all conditions cleared. Closing paperwork is typically prepared shortly after the clear to close is issued.
Loan-to-value – LTV represents the loan amount compared to the purchase price. For example, if you are borrowing $320,000 for the purchase of a $400,000 property, then your LTV is 80%.
These are the most common mortgage terms that home buyers will come across during the mortgage process. Consult with a lender for additional information.
By Suzanne Plewes, RE/MAX Alliance.