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Mortgage Terms

In early years of an amortized loan, almost all of the payment is applied toward interest, while in the last years of the loan, almost all of the payment is applied to reduce the principal.
Closing Costs & Prepaids
Costs paid in addition to the down payment on closing day. These items can include attorney fees, loan origination fee, loan discount point, application fee, appraisal fee, credit report, document preparation, escrow fee, survey and recording fees, tax escrow, hazard insurance, flood zone certification, two months of private mortgage insurance (if down payment is less than 20 percent) and sometimes the entire first year’s private mortgage insurance premium. Typically, the appraisal and credit report fees are paid at application.
Down Payment
The difference between the mortgage and the lower of the purchase price or appraisal. The minimum down payment is three percent on most loans. Private mortgage insurance is required for a down payment less than 20 percent.
Earnest Money
Deposit money given to the seller by the potential buyer to show that he is serious about buying the house. If the deal goes through, the earnest money is applied to the down payment. If the deal does not go through, it may be forfeited.
The difference between a home’s fair market value and the loan amount, and/or encumbrances (such as liens or claims) against it.
Market Rate
An estimate of the average interest rate being charged by lenders for conventional (Fannie Mae/Freddie Mac) or FHA/VA loans.
Good Faith Estimate
An estimate of all closing costs including pre-paid and escrow items as well as lender charges; must be given to the borrower within three business days after the loan application submission date.
Origination Fee
The origination fee is what the lender charges for establishing the loan. It is included in the closing costs and may be financed.
Points or Discount Points
a point or discount point is one percent of the loan amount and is charged by the lender to issue a loan at below market rates.
Private Mortgage Insurance
On conventional financing, lenders require that the borrower purchase Private Mortgage Insurance (PMI) to protect the lender against default on loans with less than 20 percent down payment. PMI has nothing to do with homeowners insurance or credit life insurance. PMI should cost the same at all lenders.
A buyer must qualify for a loan. Typically, the monthly payment cannot be more than 25 percent to 28 percent of the buyer’s gross monthly income, and all the buyer’s monthly debt cannot total more than 33 percent to 36 percent of his/her monthly income. Some leeway may be granted based upon prior credit history, down payment, job history, etc.
An instrument that shows the buyer has a clear ownership of the property. A loan does not usually close until the title company has assured the lender that there are no hidden problems with a title to a piece of property.
Title Insurance
A policy required by the lender and paid for by the borrower that insures the lender clear title against future claims. Borrowers may also purchase title insurance to protect their equity.



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