Glossary of Terms

What is the difference between interest rate and APR?

The difference between an interest rate and an annual percentage rate is that the interest rate is the cost paid annually to borrow money. The annual percentage rate reflects the interest rate as well as points, mortgage broker fees, and other charges that you have to pay to get the loan. There are several costs associated with taking out a mortgage.

These include:

The interest rate: This is the proportion of a loan charged as interest to the borrower, it is expressed as an annual percentage of the outstanding loan.

Points: This is also known as discount points which are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which is done to lower the monthly mortgage payment. A point is expressed as 1% of the mortgage amount.

Fees: Lenders charge fees for processing loan applications, these are employed to cover the cost of putting the loan together.

What are closing costs?

Closing costs are the fees which are included in the loan at the closing of the purchase transaction; the cost can be assumed by either the seller or buyer. The closing point is when the title of the property is transferred from the seller to the buyer.

What fees can you expect at closing?

Where you live, the property type you buy and the loan type you get all affect the closing costs. You will be responsible for a variety of fees and expenses that both you and the seller will pay at closing time. The lender will need to provide a good-faith estimate of all settlement costs.

The title company or other entity conducting the closing will tell you the required amount for:

• Down payment Loan origination Discount fees, better known as points which are paid to receive a lower interest rate
• Home inspection Appraisal Credit report
• Private mortgage insurance premium
• Insurance escrow for homeowner’s insurance, if being paid as part of the mortgage
• Property tax escrow, if being paid as part of the mortgage.
• Lenders keep funds for taxes and insurance in escrow accounts as they are paid with the mortgage, then pay the insurance or taxes for you.
• Deed recording
• Title insurance policy premiums
• Land survey
• Notary fees
• Proration’s for your share of costs, such as utility bills and property taxes

Common myths about home buying:

1: Looking first for a house. Most people begin looking for a home first when they should check their credit first. You want to ensure that your credit is good in order to get a competitive interest rate. In addition, you want to get pre-approved by a lender in order to determine what you can afford to buy.

2: Choosing a thirty-year mortgage. Many buyers choose a thirty-year mortgage because it provides a cheaper monthly payment than its 15-year counterpart. However, it is usually the opposite because the buyer is actually borrowing the same loan amount for twice the period and at a higher interest rate.

3: You should put twenty percent towards the down payment. Putting twenty percent as a down payment will avoid having to pay the private mortgage insurance; however, you can easily get a loan with as little as five to ten percent down, in addition to paying the monthly PMI. An alternative if you qualify could be an FHA loan with as little as 3.5% down.

4: The down payment is the only up-front cost. Sellers often expect the buyer to assume the closing costs, which can vary by as much as three percentage points depending on the state where you live. In addition, you must take into account other costs such as inspections, credit reports, insurance, fees, and taxes.

5: No one will lend you if your credit is bad. Having bad credit will keep you from obtaining a conventional loan, however, but you can qualify for an FHA loan with only a 3.5% down payment even if your credit score is below 600.

6: Home inspections aren’t needed. Unless you are willing to take the house “as is”, you should insist on having the property inspected. A proper inspection will reveal any hidden problems with the home.

7: The asking price is non-negotiable. Pre-approved buyers with excellent credit and a down payment have greater leverage when submitting a bid. Sellers are usually more inclined to take an offer from a committed buyer. This is especially true if you also have a home inspection that reveals any issues with the property.

8: You don’t need a real estate agent. A real estate agent brings a great deal of expertise to the table, from negotiating skills to search tools that help reveal things that an internet search won’t.

9: Schools don't matter if you don't have kids. Good schools are a sign of a good neighborhood and this can weigh heavily in the future if you do have children or decide to sell the property.

How much can you afford?

Lenders use a standard rule to evaluate your monthly mortgage payment, this includes the principal, interest, taxes, and insurance; and the sum of these items should not exceed 28% of your income before taxes. It is meant to measure the buyer’s debt to income ratio, commonly called housing ratio.

Buying vs Renting a House

There are a number of factors both for and against either decision. On the one hand, renting tends to be a matter of economics (if you’re a millennial just venturing into the job market) or convenience if you’re a retired empty nester who is downsizing. Ultimately renting affords you mobility.

Owning property, on the other hand, is at the core of the American dream and the foundation on which the economy is built. Despite the purchase cost and continuous maintenance involved, homeownership provides stability while building equity.

Understanding appraisals

Appraisals are conducted to obtain an opinion of the value of a particular property. When used to obtain a loan, federal regulation requires either the lender or real estate agent to submit the order. They, in turn, contact a licensed appraiser to conduct the inspection, who in turn will determine the scope of work. This includes whether the inspection covers the interior, exterior or both and any other specific lender requirements.

THE APPRAISAL PROCESS

• If an appraisal is required, the appraiser will contact the homeowner or the agent or seller in the case of a sale, to inspect the property.
• The appraiser will research county and municipal records, Multiple Listing Service records, and other data services for information concerning the subject property and market area.
•  The appraiser will study the most recent sales and listings of comparable properties to help make a determination
• The appraiser may use a cost approach to reach an opinion of value. This is the estimate of the replacement cost of rebuilding the existing structure, minus the estimated depreciation, plus the value of the land.
• An appraiser may also employ the income approach which is often used in appraisals of properties that have two, three or four living units, where income is a factor in the decision-making process of buyers and sellers.
• After the appraiser collects the data and analyzes it, he/she will submit an opinion of value by the sales comparison approach, as well as the cost approach or income approach, where applicable.

Understanding your credit score

Credit scores are used to determine the likelihood of being repaid in a timely manner. Credit scores are built based on a person’s credit history and range between 330 and 830. The higher the score the less risk the person represents and the better the interest rate they are apt to get. Credit scores are segmented into two categories, generic and custom scores.

Generic scores are used to determine general credit risk and can be accessed as a single score with the three credit bureaus.

Custom scores consist of a combination of credit reports and account history by individual lenders measuring customers within their own portfolios.

There are a number of factors such as debt, type of accounts, number of payments and the age of the accounts that affect your score. These factors allow lenders to determine at a particular point of time the person’s ability to repay the debt.

Documents you’ll need:

If you are applying for a loan, a lender will require a number of documents to verify your finances including income, debt, and assets. With this in mind, the applicant will need to compile the following list of required documents:

• W-2 forms from the previous two years, if you collect a paycheck.
• Profit and loss statements or 1099 forms, if you own a business.
• Recent paycheck stubs.
• Most recent federal tax return, and possibly the last two tax returns.
• A complete list of your debts, such as credit cards, student loans, car loans and child support payments, along with minimum monthly payments and balances. Provide a list of all of your assets, including bank, mutual fund, brokerage statements, real estate and automobile titles.
• Canceled checks for your rent or mortgage payments.

What is pre-approved versus prequalified?

Being prequalified requires you to submit your overall financial profile, including debt, income, and assets; it’s the first step towards obtaining a mortgage loan. Being prequalified allows the lender to explain the various financing options available to you and the mortgage amount you can afford.

To be preapproved requires you to fill out a mortgage application, in addition to providing the necessary documents study your financial background and credit rating. Based on the results the lender can tell you the loan amount for which you are approved and the interest rate you will be charged.

Once you have been pre-approved you will receive a conditional commitment for the exact loan amount, this will allow you to look for a home in that price range. Being pre-approved allows you to search for a home sure in the knowledge that you can finance it; it also sends a message to the seller that you are a serious buyer.

What is PMI?

PMI stands for Private Mortgage Insurance which is required if your down payment is less than 20%. In addition, PMI is necessary if you decide to refinance the property with less than 20% equity. PMI is meant to protect the lender if the property goes into foreclosure. PMI fees vary according to your credit score and the size of the down payment.

Finally, you can cancel PMI payments once you have paid down the loan balance to 78% of the property’s original value

Closing on a home

Here’s a checklist of things you should do once you have sold your property and removed everything out of the home.

• Keep all of the executed documents (seller disclosures, purchase contract, and addendums) in a single file and stored in a safe place; in case you need to refer to them at a later date.
• Leave the house clean, just the way you would like to receive it if you were the buyer. Shut off all valves and leave a note to the buyer.
• Be present at the final walk-through to explain any of the property’s unique aspects to the buyer.
• Wait until the deed has been recorded or title transferred to cancel your insurance policies. Make a checklist of the utilities and related services to cancel or transfer them to the buyer.
• Place house keys, remotes and other access devices in a bag and leave them in a kitchen drawer for the buyer.
• Place receipts, warranties and appliance manuals in a file and leave them in a kitchen drawer for the buyer.
• Do a final check of drawers, cabinets and storage areas to ensure you retrieved everything.
• Close up the house by turning off lights, closing drapes and locking the doors and garage entrance.

What is in a monthly mortgage payment?

The monthly payment includes principal, interest, homeowners insurance and property taxes divided into 12 payments which are used to determine what your monthly homeowner's insurance will be.

Principal: This is the amount borrowed or still owed on the loan Interest: This is the amount of money paid at a particular rate for a loan

Homeowners insurance: Property insurance that protects the property from damage as well as liability coverage for accidents that may occur in the same

Property taxes: Often called a millage tax which is a levy on the value of the property and levied by the local government authority.

Avoid the top 5 regrets of new homeowners

Here is a list of things you should consider before you decide to purchase a home and avoid regrets later.

• Examine the property to avoid costly repairs If you have kids, ensure that the home is in a good school district
• Don’t fixate on a specific neighborhood, you could get a better deal (and a bigger home) elsewhere
• Explore all of the loan options available to you, the costs involved and the time it will take to get financing Make a bigger down payment, in the long run you’ll pay less.
• Make sure you have enough savings to cover future unknown costs such as childcare

Understand what improvements enhance the value of your home

• Your neighborhood and location have an impact on the increase in value.
• The correlation between the cost of a particular home improvement and the return on investment is not linear.
• Cleaning, decluttering and staging a home for sale can enhance the value without having to invest any money.
• Improve the chances of more buyers seeing your property by investing in a well-executed website to showcase your home.
• Consult an interior designer or real estate agent prior to making any home improvements to ensure you invest in the appropriate project to enhance the value of your home.

What is an escrow account and how does it work

Escrow accounts are created usually by a lawyer or title company to hold all the documents and deposits during a real estate transaction. During the course of the transaction, the escrow officer will ensure the process runs efficiently and everyone is paid; in addition to recording the deed and title transfer. The escrow officer will usually charge between 1% and 2% of the properties cost.

There is a second type of escrow account which the lender will manage, holding money to pay the property taxes and insurance. A portion of these monies is paid every month along with the principal and interest. By year-end, the lender will adjust the payment based on the actual tax and insurance bill.

When does refinancing make sense?

The conventional wisdom concerning refinancing is to estimate your breakeven point; simply stated it’s the time it will take you to recuperate the closing costs you’ll pay to refinance. This can be done taking the amount you pay to refinance and divide that number by the amount of money you will save per month due to the refinance. The result will tell you the number of months it will take to cover that expense, after that you will be receiving the full benefit of the refinancing.

The key question you must ask is whether you are solving a problem or saving money. Consider that you may be saving money short term based on your cash flow; however you must take into account that despite the fact that you are refinancing at a lower rate you are in effect restarting the clock on the mortgage and in effect will be paying off less of the principal (amortization) which could result in paying more in the long run.

What is the difference between a short sale, pre-foreclosure and a foreclosure?

In a short sale, the owner owes more than the property’s market value and may be in foreclosure. In this case, he/she can request a short sale from the lender who if they approve, will accept the sale based on what’s been paid to date.

In a pre-foreclosure the owner is more than 90 days behind on their payments; at this point, the lender will begin the foreclosure process by issuing a notice of trustee sale.

A foreclosure occurs when the borrower doesn’t pay the outstanding payments and the lender takes over the property. At this point, a trustee will schedule the property for auction at the courthouse.

Insurance and home inspections

Your homeowner’s insurance policy is designed to cover your home for the worst case scenario which would be to rebuild the house in its entirety. With that in mind, the lender will want to conduct an inspection in order to adequately insure the property.

Home Insurance Inspection Checklist

The roof: The condition and age of the roof can affect the cost of your insurance policy.

The foundation: Cracks in the foundation are the most common damage, causing a range of problems form leaks, termites, and structural issues.

The electrical system: Old electrical systems can cause power surges, personal injury, or fires.

The plumbing system: Bad plumbing leads to leaking pipes and flooding, seriously damaging a home.

Signs of damage: Termites and routine flooding increase the likelihood of a client making a claim on their insurance policy.

The furnace: Malfunctioning furnaces leak carbon monoxide, impairing the air quality of your home. Carbon monoxide poisoning can lead to a range of serious health problems, from chronic headaches to brain damage and death

Gutters: Gutters or downspouts that aren’t adequately diverting water away from the house can contribute to flooding issues or damage to the foundation.

Pets: Pets are the cause of roughly 30% of home insurance liability claims.

After your inspection, your insurance company will contact you about alterations to your policy and coverage quote.

The benefit of working with a realtor

If you're looking for something specific, a real estate agent is the qualified person who knows whether there is a house on the market that fits your needs; in addition to helping you through the entire home buying process.

Here are some of the benefits of working with a real estate agent:

1. Most real estate agents are members of the National Association of Realtors, who abide by a code of ethics that requires them to deal honestly with all parties throughout the transaction process. Real estate agents are required to act in their customer’s best interests and need to fully disclose any problems with a property in addition to being transparent in regard to advertising their services.

2. Experienced real estate agents know the value of the homes in their trading area and can tell when a property is under or overpriced. Knowing these things saves a lot of time by not touring houses out of your price range.

3. A real estate agent can identify issues with a property and recommend a home inspector to provide a detailed report on the property.

4. A real estate agent can navigate through an inspectors report and evaluate which are the critical issues and which are not. The real estate agent can recommend what are reasonable requests and which are excessive.

5. Real estate agents have access to reports (MLS) that the average person seeking a home will not find online. A lot of sellers don’t want their neighbors to know they are selling; hiring a real estate agent provides access to homes you otherwise would not know are on the market.

6. A real estate agent can save you time and money as they are fully familiar with all the paperwork involved. They can catch errors, know if something is missing and in general speed up the process versus if you were to do it yourself.

7. Real estate agents are aware of features that don’t always show up on an internet search. This is especially true if you are looking for a particular feature such as an office room or extra storage space.

8. Buying or selling a home can be an emotionally charged experience, hiring a real estate agent will allow you to deal effectively with your counterpart, especially in situations where patience can run thin. In these cases it's best to have a real estate agent who can act as a moderator.

9. A real estate agent will be familiar with local zoning laws to ensure you don’t purchase the wrong property. Furthermore, an agent can save you time and money by identifying whether a property requires particular upgrades to be up to code.

10. Real estate agents are required to maintain records of the transactions, which may be useful in the future when you need to retrieve a document you may have misplaced.