The Numbers

Let us help you understand Interest Rates, Points, Costs & Fees so that you can make informed loan decisions.

Credit Report:  Typically, it costs under $50 to check your credit.  With your permission the lender will order a review of your outstanding loans and your repayment history from a third party credit agency.

Application / Processing Fee:  This cost, typically a few hundred dollars, is charged to cover the lender’s work to evaluate your ability to repay the loan.  Some lenders will credit this back to you upon closing.

What is APR?  The APR, or annual percentage rate, is the sum total of all your borrowing costs expressed as a percentage interest rate charged on the loan balance.  For example, after fees, the original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed, and the principal payments are calculated based on the length of the loan term (for example 15, 20, or 30 years).

Indexes:  The interest rates on variable loans readjust periodically based on changes in an index.  Typical indexes include the Federal Funds Rate, Treasury Bill.

Points:  When mortgage companies are competing by offering lower interest rates, they may charge you a one-time pre-paid interest payment calculated as a percentage of the loan.  Called “points”, this may range from 0.25% to 2% of the loan balance, and is usually paid up front.  Points are tax-deductible; so consult with your tax advisor.

Private Mortgage Insurance (PMI):  Also known as Lenders Mortgage Insurance (LMI) is insurance payable to a lender that may be required when taking out a mortgage loan.  It is insurance to protect the mortgagee in the event a mortgagor is not able to repay the loan, and the lender is not able to recover its costs after foreclosing the loan and selling the mortgaged property.  The annual cost of PMI varies between 0.19% and 0.9% of the total loan value, depending on the loan term, loan type and proportion of the total home value that is financed.

The  LMI may be payable up front, or it may be capitalized onto the loan.  This type of insurance is usually only required if the down payment is less than 20% of the sales price or appraised value (in other  words, if the loan-to-value ratio (LTV) is 80% or more).

If a  borrower has less than the 20% down payment needed to avoid a mortgage insurance requirement, they might be able  to make use of a second mortgage (sometimes referred to as a  "piggy-back loan") to make up the difference. Two popular  versions of this lending technique are the so-called 80/10/10 and  80/15/5 arrangements. Both involve obtaining a primary mortgage for  80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a  10% downcpayment,  and an 80/15/5 program uses a 15% LTV second mortgage with a 5% down payment.  Other combinations of second mortgage and down payment amounts might also be available. One advantage of using these  arrangements is that under United States tax law, mortgage interest  payments may be deductible on the borrower's income taxes, whereas  mortgage insurance premiums were not until 2007.

Appraisal Cost:  Lenders hire experienced, often independent appraisers to evaluate the property’s purchase price, condition and size compared to similar recent property sales.  This helps ensure the purchase price is not too high, and gives the lender more confidence in getting repaid in the event they are forced to sell the property if the borrower defaults.  The appraisal costs vary depending on the property, type of appraisal, and region.

Miscellaneous Fees:  Expect to see various charges incurred in the processing of your loan which might include notary, courier, and county recording fees.

Prepayment Penalties:  These vary widely, so be sure you know in advance if your lender will charge a penalty if you refinance or sell, and the certain period during which the penalties apply.



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