NEW YORK (MainStreet) — The mortgage industry is no different from the rest of the financial or tech world and is fraught with odd terminology, tons of acronyms and other confusing jargon.
While it appears to be a great deal of inaccessible blather, learning what these terms really mean can save homeowners thousands of dollars as they are negotiating the terms of their mortgage.
Unpacking the lingo is the first step as you sink your hard-earned money into a house for the next 30 years. Pretty soon you can banter about points and closings just like the rest of the experts.
Here are ten terms that we demystify as you prepare to embark on one of the largest commitments in your lifetime.
Freddie Mac, Fannie Mae and Ginnie Mae - Is There a Family Connection?
Just who exactly are Freddie Mac and Fannie Mae? What about Ginnie Mae? This trio was created by the federal government to support a national market for mortgage credit, said David Reiss, a law professor at Brooklyn Law School in New York. None of these entities interacts directly with homebuyers. Instead, all have the goal to make it easier for mortgage lenders to sell mortgages to investors by promising “those in mortgage-backed securities that they will receive their payments of interest and principal in a timely manner in case borrowers default on their payments,” he said.
After a wave of foreclosures following the Great Depression, Ginnie Mae was created by the government to support affordable housing in the U.S. Now it provides funding for all government-insured or government-guaranteed mortgage loans.
The down payment is the amount you pay upfront towards the purchase of your house. A typical amount is 20% although there are loans which allow for 5% or 10%. The down payment represents the buyer’s “skin in the game,” or his personal risk, said Ray Brousseau, executive vice president of Carrington Mortgage Services in Santa Ana, Calif. If you are a first-time homebuyer, you should be aware that lenders examine the “seasoning” of the down payment or show that the funds have been in your bank account for 60 to 90 days, he said.
Real estate brokers and mortgage lenders discuss points quite often, especially as you get closer to finalizing the terms of your mortgage, since they are negotiable. This refers to the percentage points of the loan amount that a lender charges to a borrower for a loan, Reiss said. For instance, if a lender charges 1 point on a $200,000 loan, the borrower will owe an additional $2,000 to the lender at the time the loan is closed.
This is the annual percentage rate. Many homeowners focus only on the interest rate or the monthly payment. The APR gives you a better idea of the true cost of how much you are borrowing, which includes all the fees and points for the loan.
This will give you the total cost, said Jason van den Brand, CEO of Lenda, the San Francisco-based online mortgage company. If you have two loans to choose from and both of them have a 4% interest rate, but loan 'A' has a 4.10% APR and loan 'B' has a 4.25% APR, the better one is loan 'A,' which provides the lowest cost of borrowing the money.
This is a fee that is charged by a lender to process a loan. This fee shows up on your good faith estimate (GFE) as one item called the origination charge. However, the origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge, van den Brand said. The average origination fee is 1% or 1 point, but it is a negotiable fee since “it's well understood that this fee is mainly used to pay commissions to sales people,” he said.
The origination fees can also be referred to as origination points. It is possible that you can get a mortgage with no origination fee. This means that the broker will get paid by the bank, but the catch is you often end up paying a higher interest rate for the mortgage.
“If you can save thousands of dollars on your loan, that is money that can be better invested in other areas,” van den Brand said. “For example, a 0.25% difference can amount to tens of thousands of dollars saved over the life of the loan.”
This is the prepaid interest you pay to buy down your interest rate, and one point equals 1% of the loan value, van den Brand said. Buying down your interest rate can have a big impact on your monthly payment and the amount of interest you pay over the life of a loan.
“If you're able to buy down your rate so you can lower your monthly mortgage payment, it might be a good thing to do,” van den Brand said. “If you are paying discount points to get a lower rate which in turn lowers your monthly payment by $25 a month, but it costs $2,500 to do that, it will take 100 months to break even. Usually, the longer you stay in your home, the more time you have to recoup the costs associated with paying points and fees.”
These are all of the costs incurred for the loan and include everything from origination fees, title fees, appraisal fees, attorney's fees and underwriting fees. The typical closing costs are usually 2% to 5% of the loan value.
Since most people finance their closing costs, it adds to the loan amount and can increase the monthly payment. In some instances, the seller of the property may contribute to the closing costs on the transaction.
A closing is the last step and occurs when you are ready to sign the mortgage documents, and it typically takes place at a title company. This is when the title to the property changes hands. The title company will act as an escrow agent for all the parties, said Sam Shiel, director of title operations and underwriting counsel at Proper Title, a title insurance agency in Northbrook, Ill. The parties present are likely to be you, the title company’s escrow officer or “closer,” the seller and real estate agents. Be prepared to sign dozens of pages of documents before you are handed a key to your new home.
A handy website which explains many of the points of the industry is the Consumer Financial Protection Bureau’s “Your Home Loan Toolkit."
--Written by Ellen Chang for MainStreet