5 Mortgage Closing Terms Every Home Buyer Should Know
Buying a home is the largest investment that most people will make in their lifetime, and there are many factors to consider. It is important to educate yourself on the terminology that will be discussed during the closing process. This will lead to a more professional and comfortable situation for all parties. Here are a few common closing terms you may hear throughout the closing process.
Annual Percentage Rate (APR)
The Annual Percentage Rate is the total cost of all finances and credit over the course of one year. This includes the interest rate, points, broker fees, and any credit charges which the buyer is obligated to.
As with most transactions involving a large sum of money, the mortgage process requires a down payment. This is the amount a buyer pays to make up the difference between the purchase price and the total mortgage amount. Sometimes, experts advise a down payment of no less than 10% or 15%. However, an amount over 20% may be required in order to avoid having to pay for private mortgage insurance (or PMI), and is often recommended.
Loan Estimate (LE)
Your lender is required to issue a Loan Estimate by the Consumer Financial Protection Bureau, or CFPB. The Loan Estimate details the terms of your loans and estimated closing costs, and must be issued within three business days of your lender receiving your mortgage application.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance is usually required if a borrower pays a down payment less than 20% of the value of the home. PMI is usually included in the monthly mortgage payment in order to protect the lender from a possible default on the loan.
Also called settlement costs or transaction costs, closing costs include any fees or charges associated with finalizing your closing, including: