Basic Home Financing Terms

Home Financing TermsWhether you are looking to refinance, buy a primary home, or purchase a vacation get-away, understanding basic home financing terms is crucial to your real estate success. Here are a few terms to get you started.

Interest Rate

The interest rate is the number used to calculate the interest payment the borrower owes the lender on the loan amount. It can have a significant effect on how much house you can afford to purchase. While a small difference in interest rates (1 – 1.5%) may only add about $70 to a payment on a $100,000 loan, this can add up over the full life of the loan. Keep in mind though, many buyers choose to sell or refinance their home before the full loan term is finished.

Interest rates can change often and are related to Bond prices. Weak economic news normally causes money to flow out of stocks into bonds, thereby helping bonds and mortgage rates to improve. Strong economic news normally has the opposite result.

Refinance

Refinancing is the process of paying off your current loan with the proceeds from a new loan on the same property. Typically refinancing is done for the purpose of obtaining a lower interest rate. This may be an attractive option, but you should do the math first to see if it makes sense.

Points

Points, or discount points, are fees the borrower can choose to pay the lender upon the closing of a loan. A type of pre-paid interest, one point is the equivalent of one percent of the total loan amount – 1 point on a $100,000 loan is a $1,000 payment.

Borrowers aren’t required to pay points, but a no-point loan will result in a higher rate. There is an inverse relationship between the points required for the loan and the interest rate you receive – the more points you are able to pay, the lower the interest rate and the less money you will pay over the life of the loan. Borrowers who are able to pay a higher number of points can receive a lower rate.

Down Payment

A down payment is the initial, upfront payment for a portion of the total amount due for the purchase of the property. Down payment amounts in the US are typically in the 3.5% to 20% range, with 20% representing the cutoff point of the borrower requirement of obtaining private mortgage insurance (PMI).

Private Mortgage Insurance (PMI)

When the down payment is less than 20% of the property value, PMI – or Private Mortgage Insurance – is required by the lender. A down payment of 20% of more will allow you to avoid PMI and pay less over the life of the loan, Private mortgage insurance can run from $45 to $60 per $100,000 in purchase price.

These are just a few of the major terms you will hear when buying or selling a property. The important thing is to know who to ask when there is something you don’t know. Your real estate professional and loan officer are great resources for the answers you need.

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