Terms You Hear at a Closing

There are many factors to consider when buying a home. When it comes to the closing process, it is a good idea to know the terminology that will be discussed. This can help make the situation much more comfortable and professional for all parties involved. Below are some of the terms that may be discussed during the closing process.

ANNUAL PERCENTAGE RATE (APR) This term reflects the cost of all credit and finances as determined by the length of a year, including the interest rate, points, broker fees, and other credit charges obligated to the buyer. Simply put: this is the price you pay to borrow the money to buy the home. There will either be a fixed APR or a variable APR. A fixed APR means the APR doesn’t change based on an index during the life of the loan. Because of this, fixed APRs can be more predictable when it comes to budgeting.

PRIVATE MORTGAGE INSURANCE (PMI)  This term is insurance coverage that homeowners are required to have if they’re putting down less than 20% of the home’s cost. Basically, PMI gives mortgage lenders some backup if a house falls into foreclosure because the homeowner couldn’t make their monthly mortgage payments. The charge is usually included in the monthly mortgage payment in an attempt to protect the lender from a possible default.

DOWN PAYMENT Like many transactions involving large sums of money, the mortgage process involves a down payment – the amount a home buyer pays in order to make up the difference between the purchase price and the mortgage amount. Some experts advise no less than 10% to 15%. However, any amount over 20% of the purchase price is often recommended, and may be required to avoid having to pay for private mortgage insurance.

LOAN ESTIMATE (LE) The Consumer Financial Protection Bureau, or CFPB, requires your lender to issue a Loan Estimate within three business days of receiving your mortgage application. All relevant loan data, including estimated monthly payments, the cost of interest and your interest rate are included. You can also review other costs associated with the loan, such as recurring taxes, one-time costs, fixed fees and negotiable fees.

It is important to note the loan estimate is designed to provide the potential terms of your loan. Lenders will request additional financial data from you to complete the loan documents. However, the ability to change terms is limited, particularly in certain cost categories.

CLOSING COSTS This term refers to the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction. Closing costs may also be referred to as transaction costs or settlement costs and may include various fees and charges associated with finalization. These may include or be related to application fees, title examination, title insurance, property fees, as well as settlement documents and attorney charges.

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