Understand the
numbers
Buying a home is one of the biggest financial decisions you’ll make, and understanding the various terms and fees associated with your mortgage can help you make informed choices. Let’s break down some of the common elements:
1. Credit Report:
- What: This is a detailed report of your credit history.
- Cost: Typically under $50.
- Purpose: Lenders use this to gauge the risk of lending to you by examining your past financial behavior.
2. Application/Processing Fee:
- What: A fee for processing your mortgage application.
- Cost: Varies, but often a few hundred dollars.
- Purpose: Covers the lender’s administrative costs in assessing your repayment capabilities.
3. APR (Annual Percentage Rate):
- What: The total annual cost of your loan, including interest and fees, expressed as a percentage.
- Why It Matters: It gives a more comprehensive picture of how much you’ll be paying than just the interest rate alone.
4. Indexes:
- What: Benchmark interest rates that determine changes in the interest rate of an adjustable-rate mortgage (ARM).
- Common Indexes: Federal Funds Rate, Treasury Bill.
5. Points:
- What: Upfront charges that you pay to get a lower interest rate.
- Cost: Usually between 0.25% to 2% of the loan balance.
- Why It Matters: You’ll need to decide whether it makes sense to pay points to lower your rate or take a higher rate without points.
6. Appraisal Cost:
- What: A valuation of the home you’re buying.
- Purpose: Ensures you’re not overpaying and that the lender isn’t lending more than the property is worth.
- Cost: Varies based on the property and region.
7. Miscellaneous Fees:
- What: Various additional charges.
- Examples: Notary fees, courier charges, county recording fees.
- Purpose: Cover various administrative costs associated with processing the loan.
8. Prepayment Penalties:
- What: A fee for paying off your loan earlier than the specified term.
- Why It Matters: Some lenders charge this to recoup the interest they miss out on when you pay early.
Conclusion:
There are numerous costs and terms to understand when getting a home loan. Always review your Loan Estimate and Closing Disclosure forms to understand all fees and costs. Ask your lender to explain any charges you’re unsure about, and remember, many fees are negotiable. Being informed can save you money and stress in the long run.