Mortgage loans decoded: A guide to homebuying terms
Mortgages can baffle the savviest financier. Our language guide can help.
It's hard to believe, but mortgages have been around for over 820 years! Of course, they've changed a bit since the middle ages: once a rarity, they're now a standard part of the homebuying process, making it possible for millions of people around the globe to buy homes every year. They've also gotten more complicated. Today's complex, sometimes lengthy process can befuddle even the financial savvy borrower. With that in mind, here's a short cheat sheet to help you navigate the terms you'll encounter during your home lending process—and find your way into your new home.
Before agreeing to issue you a mortgage, your lender may ask you to pay for an appraisal—or unbiased estimate—of the property value. This generally costs $300-$400 and tells the lender what a property is likely to sell for. Getting an appraisal can help protect your lender—and you—from committing to a house whose price is wildly inflated.
Closing costs are all the fees and charges that go into buying or selling a home. For the seller, they may include ownership transfer fees and real estate agent commissions, while buyers often have to pay mortgage and homeowner insurance, appraisal fees and property taxes.
FHA and FHA Loans
Designed for first-time home buyers and those with lower credit scores and savings, Federal Housing Administration (FHA) loans require smaller down payments and lower credit scores than traditional loans.
If you want to avoid costly, unexpected repairs, think about getting a formal home inspection by a certified home inspector. Inspectors can survey a home for termites, mold, structural damage, and a host of other pitfalls. Use this checklist to evaluate your inspector's credentials.
Mortgage brokers work with home buyers to help find competitive mortgage rates. In return, they generally charge one to two percent of the final purchase price.
If you can't afford a down payment totaling 20 percent of your home's purchase price, your lender may ask you to take out mortgage insurance, which helps protect the lender in case you stop paying the loan. If you don't have a full down payment, but don't want to take out private mortgage insurance (PMI) there are a few other options, including VA loans and lender paid mortgage insurance.
Before issuing a mortgage, a lender or insurance company may request a mortgage survey. This generally costs from $373 to $499, depending on location, and verifies that the property matches the title. Among other things, it clarifies the true land boundaries of the property, make sure that it meets setback restrictions, ensures that it doesn't overhang on another property, and makes sure that no one encroaches on the property.
Also known as mortgage points or discount points, points enable a house buyer to prepay interest on their loan. Basically, it works like this: you pay one percent of the cost of your loan, in return for which your interest rate drops slightly. The payoff is twofold: You reduce your interest rate over the course of the loan, and also cut your monthly mortgage payment.
After you close on your home, you need to record the deed at your county recorder's office. Recording fees vary by county, but the national average is $125. Depending on how the sale becomes structured, recording fees may become part of the closing costs.
A title is the document proving legal ownership of a property. It outlines the basics of the property—the outlines of the lot, the buildings on the lot, the access to the lot, how the lot can be used, and so forth.
To determine the legal owner of a property—and discover any unpaid taxes, fees, or lawsuits that may prevent the owner from selling the property—you'll need to order a title search. You can do this yourself at the local courthouse, or hire a professional title searcher, who usually charges $75-$250.
Debbi Gardiner McCullough reports on business and social trends from Wisconsin.