5 Mortgage Closing Terms Every Borrower Should Know

When the housing crisis and economic recession hit, it put many prospective homebuyers' plans on hold.  Some had to remain in a house that was too small or in a less desirable location.  Some had to continue to rent. Now, as the economy continues to improve, and the Spring approaches (yes, believe it or not, it is!), some of those people are now looking to get off the sidelines and buy a new home.

Also, while interest rates are now slightly higher than they were in 2012, which was the last big refinance boom, some homeowners were unable to refinance then because they did not have enough equity or due to other economic factors.  Now, in 2014, interest rates still remain very low by historical standards and it may be a good idea to refinance.

When it comes to the mortgage closing process, for either a purchase or refinance, it is very important for borrowers to have a basic understanding of the terminology that will be used by the lender.  This will make the situation much more comfortable and professional for everyone involved.  Therefore, I have listed below 5 of the most important terms that will be discussed:

1.  Annual Percentage Rate (APR) - This term reflects the cost of all credit and finances as determined by the length of a year.  It combines the interest rate, points, any mortgage broker fees, and other credit charges which the borrower is obligated to pay.

2.  Truth-in-Lending Disclosure (TIL) - Required by Federal law, the Truth-in-Lending Disclosure explains all costs required by the lender including, but not limited to, the Annual Percentage Rate, the terms of the loan and the amount and due dates of all payments necessary to repay the loan.

3.  Closing Costs - Closing costs may also be referred to as transaction costs or settlement charges, and may include various fees and charges associated with finalizing or settling the loan.  These may include or be related to application fees, credit report fees, flood zone determination fees, title examination fees, lender's attorney's fees, title insurance premiums and document preparation charges.  Some borrowers may be required to pay money into an escrow account to be held by the lender for payment of real estate taxes homeowners' insurance.  While these are required to be paid at closing, they are technically not "closing costs" as the borrower is simply paying their own money to the bank to hold for them.  The Federal law called RESPA (Real Estate Settlement Procedures Act) requires lenders to send to the borrower a Good Faith Estimate (GFE) of closing costs within three days of receiving the borrower's application.  The GFE states in detail each expected closing cost.

4.  Down Payment - Like many transactions involving large sums of money, the mortgage process involves a down payment - the amount a homebuyer pays to make up the difference between the purchase price and the mortgage amount.  Some experts advise no less than 10 to 15 percent.  However, with the economy still recovering and lenders still strict, any amount over 20 percent of the purchase price is recommended, and is often required in order to avoid paying Private Mortgage Insurance.

5.  Private Mortgage Insurance (PMI) - PMI is typically required if a borrower makes a down payment that is less than 20 percent of the home's value.  The charge is usually included in the monthly mortgage payment in an attempt to prevent the lender from possible default by the borrower.  Often, a borrower's PMI will no longer need to be paid after a set period of time.  Sometimes borrowers can request that the lender remove the PMI if they feel that their home's value has increased so that they now have at least 20 percent equity in the property.  The lender may grant this request after requiring the borrower to pay for an appraisal (usually no more than $400).  

Of course, there are many other terms used in the loan process.  When buying a home, it is important to understand as much as you can because for most people, a home is by far the largest purchase they will ever make.

Andy Schwartz is an attorney with an office in Norwood, Massachusetts, concentrating in real estate law and estate planning. He is a member of the Real Estate Bar Association of Massachusetts and the Norfolk and Plymouth Estate and Business Planning Council.  He can be reached at ahs@andyschwartzlaw.com or at (781) 269-5280 with questions or comments, or visit his website at www.AndySchwartzLaw.com.