3.1 Don't be intimidated by the jargon used in financing.
Here are a number of key terms you'll see frequently in your loan
Credit report: Request your
lender to order one from a third party credit agency such as
Equifax, Experian or Trans Union. A credit report should contain
information on all your outstanding loans and repayment history.
This can be obtained annually for FREE from the
Annual Credit Report website.
This is the lender's fee for determining your capacity as a
borrower and will usually be charged upon closing of the loan.
Expect a price tag of several hundred dollars.
Annual percentage rate (APR):
The APR expresses the sum total of all your borrowing costs as a
interest rate percentage charged on the loan balance.
Indexes: Changes in indexes
such as the Federal Funds Rate and the Treasury Bill are used to
periodically readjust the interest rates in adjustable rate
Points: When mortgage
companies are competing by offering lower interest rates, they may
charge you a "point", a one-time pre-paid interest fee, calculated
as a percentage of the loan. Points are considered part of the
cost of credit to the borrower, and part of the investment return
to the lender. They may range from 0.25% to 2% of the loan
balance, and are usually paid up front. One point equals 1% and it
typically takes 4 points to reduce the loan interest rate by 1/2
Appraisal cost: This is the
fee charged by an independent appraiser who may be hired by your
lender to evaluate the property's purchase price, condition and
size in relation to similar recent neighborhood sales. This
information is necessary to the lender because it ensures
repayment in case the borrower defaults, forcing the lender to
sell the property.
Miscellaneous fees: Various
costs will be incurred during the processing of your loan request,
such as notary, courier, county recording fees and title company
Pre-payment penalties: A
prepayment penalty is a provision of your contract with the lender
that states that in the event you pay off the loan early, you will
pay a penalty. Penalties are usually expressed as a percent of the
outstanding balance at time of prepayment, or a specified number
of months of interest. They often decline or disappear altogether
with the passage of time and almost all loans today have no