Understanding Mortgage Terms

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You are in the process of purchasing your first home and have begun discussing the terms of your new mortgage. As the loan officer goes through the terms of your loan, seamlessly tossing out words like “loan-to-value,” “equity” and “subprime,” you sit there, somewhat dumfounded, and nod carelessly as your eyes glaze over. You sign the loan documents where indicated on the form without truly understanding what you just signed.It is important that, whether you’re buying a home for the first time or refinancing for the first time in many years, you understand the terms associated with the contract that you just signed. A home is one of the largest purchases that you will make in your life. You should take every opportunity to make sure that the terms associated with this purchase are ones you understand.

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Terms That Every New Homeowner Should Know

In the wake of the financial and housing crisis of 2008, changes have been made to how lenders deal with potential borrowers. Loan disclosure documents and other information necessary to inform the borrower of their obligations and rights under the contract are now required in every transaction. Truth in Lending disclosure requirements are monitored by the Consumer Financial Protection Bureau, an independent agency whose mission is to protect the interests of consumers in their dealings with mortgage lenders. Here are some terms that you may come across that you should become familiar with.

Comparable Sales (Comps)

One term that comes up often, especially if you have taken to watching new home buying shows on cable television, is that of comps or comparable sales. Comps refer to the value of comparable homes in the area where you are making a purchase. Comps are an important measure used by real estate professionals in determining the fair market value of your home and the amount that you should offer and/or pay for the home.

Closing Costs

Closing costs include all of the items making up the loan. They occur one time or are paid in advance (prepaid expenses). These costs include some of the following items: the fees of the real estate attorney to draft the contract, the cost for establishing title on the property, expenses associated with providing the record of deed to the property with your local jurisdiction and commissions that the broker receives for the transaction. In some cases, closing costs are negotiated by the buyer to be assumed in part or in whole by the seller of the home.

Principal, Interest, Taxes and Insurance (PITI)

Your loan payment to the bank or mortgage lender include the following elements: the principal loan amount, which you borrowed from the lender; the amount of interest as agreed upon in the contract, which is based on the term of the loan (15 or 30 years) and your credit rating; property taxes calculated on a pro-rata or fractional basis (each payment fraction may be represented as 1/12 for a year, 1/60 for 5 years and 1/360 for a 30-year loan) and the mortgage insurance portion of the payment.Knowing these terms is important, even essential, as part of your home-buying process. Before you commit to the purchase of your home, be sure you take the time to understand what the contract says. If you come across words or terminology that you are not familiar with, do not be afraid to ask questions and seek clarification.