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Common Mortgage Terms Explained

By Elizabeth R. Elstien

During the home-buying process, there are many terms that are important to know and understand. Get knowledgeable and learn about the most common terms your real estate agent, lender and title company will use during the home sale.

Escrow: A neutral third party that holds the funds and documents needed on both the buyer's and seller's sides. A specific person, known as the escrow officer, and perhaps an assistant is assigned to facilitate the sales process. The escrow officer checks that all stipulations and contingencies in the purchase and sale contract are carried out and, once satisfied, disperses funds to the appropriate parties.

Closing Costs: These are costs that the buyer and seller of a home pay at the time of purchase. The most significant expenses for the buyer may include an appraisal fee, title search, private mortgage insurance (PMI), points, and homeowner's insurance (terms discussed below), and prorated property taxes. Closing costs vary by lender and are in addition to the down payment (the part of the purchase price paid up front, which may be up to twenty percent depending on type of loan). Although much less a seller also has closing costs, such as their share of prorated property taxes and other expenses specified be paid by the seller in the purchase contract.

Homeowner's Insurance: Insurance the lender requires the buyer to purchase. Homeowner's insurance may protect against flood, fire, theft and injury liability.

Private Mortgage Insurance: Insurance the lender requires the buyer to carry, but may not be necessary of all buyers. This insurance guarantees the lender is paid off if the buyer fails to pay a mortgage. The amount of private mortgage insurance costs depends on the amount of the loans and the size of the down payment. Purchases with down payments of at least twenty percent don't often require this type of insurance.

Points: This is a finance charge paid to the lender by the buyer that can lower the interest rate of the loan. Each point equals one percent of the total loan and can be negotiated. Buying points is generally a good idea if getting a long term loan.

Prepayment: Making early or extra payments toward the amount borrowed (principal) that can shorten the length of your mortgage, therefore lowering the total interest paid. A lender may change a penalty for paying the mortgage off too fast. Be certain to ask your lender and read the mortgage documents to be certain there is no prepayment penalty.

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About The Author

Elizabeth R. Elstien has worked in real estate for over 15 years as a real estate...

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