Understanding Financing

Don't be intimidated by the jargon used in financing. Here are a number of key terms you'll see frequently in your loan application process.

• Credit report: Your Mortgage Company will order one from a third party credit reporting agency such as Equifax, Experian or Trans Union. A credit report will contain information on all your outstanding loans and repayment history.
• Application/processing fee: This is the Mortgage Company’s fee for determining your capacity as a borrower and usually is charged upon closing of the loan. Expect a price tag of a few hundred dollars.
• Annual percentage rate (APR): The APR, often referred to as the effective rate, is a rate which shows the true cost of borrowing inclusive of closing costs. This rate is different from the nominal (or note) rate stated in your loan documents.
• Closing statement – HUD1: A detailed written summary of the financial settlement of a real estate transaction showing all charges and credits made.
• Index: Changes in indices such as the Federal Funds Rate or the Treasury Bill are used to periodically readjust the interest rates on adjustable rate mortgages (ARMs).
• Points: When Mortgage Companies are competing by offering lower interest rates, they may charge you "points", 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 Mortgage Company. They may range from 0% to 5% of the loan balance.  One point equals 1% of the loan amount.
• Miscellaneous fees: Various costs may be incurred during the processing of your loan request such as notary, courier, appraisal, county recording, escrow, broker, and/or title insurance fees.
• Pre-payment penalties: A prepayment penalty is a provision in your contract with the Mortgage Company that states that in the event you pay off the loan early, you will pay a penalty. Penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or as a specified number of months of interest. They often decline or disappear altogether with the passage of time.

For more information on any of these issues, contact a local HomeSense® Realty Agent.