Mortgage Basics

Appraisal

An Appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an "Appraiser" typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

Credit Score

Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report.

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Closing

At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives, clerks, secretaries, and other staff. You can have an attorney represent you if you can't attend the closing meeting, i.e., if you’re out-of-state. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer, or any escrow accounts needing to be set up.

Annual Percentage Rate (APR)

The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.

The APR does not affect your monthly payments. Your monthly payments are strictly a function of the interest rate and the length of the loan.

Equity

When you get a mortgage instead of renting, you’re taking out a loan that you eventually pay off. Over time, this means that you’ll get what is called equity building in your house. Equity is the amount that your house is worth that you don’t owe to the bank. More is good, and making extra payments towards your equity growth (also known as principle) mean that you are in a more comfortable position to refinance or just weather a downturn in the market.

Private Mortgage Insurance (PMI)

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year's worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.

Refinance

There are many reasons to refinance, but one of the biggest is to get access to improved rates. Even a single percentage point difference makes a significant impact, and any reduction can reduce your monthly mortgage payments. Example: Your payment, excluding taxes and insurance, would be about $2684 on a $500,000 loan at 5%; if the rate were lowered to 4%, your payment would then be $2387, so you're saving just under $300 per month. Your savings depends on your income, budget, loan amount, and interest rate changes. Your American Freedom Funding loan officer can help you calculate your options.

Foreclosure

It's when a homeowner is unable to make principal and/or interest payments on their mortgage. The lender, a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.

If you are struggling to make your payments, call or write to your lender's Loss Mitigation Department right away. Explain your situation and be prepared to provide them with financial information like your monthly income and expenses.