When starting the home buying process, you hear all sorts of words like APR, discount points, and origination fees. without a basic knowledge of what those words mean to you and your monthly house payment, they can taint the entire home buying process with a feeling of intimidation and apprehension. So today, we thought we would share with you an article from Wells Fargo Home Mortgage which helps to explain and simplify these terms to enable you to feel more empowered and comfortable when purchasing a new home.
Interest Rate – a percentage of the loan which is paid to the bank as a service fee for allowing you to borrow money from them. The amount is based on the current market conditions, you and/or your spouse’s credit score, the down payment amount, and type of mortgage.
Discount Points – 1pt = 1% of the mortgage amount. You may be eligible to pay 1 or more pts to lower your interest rate which would lower the monthly payment. Usually these are tax deductible.
Origination Charge – this is a service fee paid to everyone involved in producing your loan. It includes fees, document preparations, underwriting fees, fees for service, and any other expenses incurred by the loan officers.
Loan Term – the amount of time the homeowner has to pay back the amount of the loan. In general, shorter terms = higher monthly payments but they have lower interest rates which will cost you less for your mortgage in the long run.
These four terms make up the APR or annual percentage rate. The beauty of the APR is that you can use it to compare mortgages of the same amount from different companies by considering their total annual cost allowing the consumer to choose the best and most affordable loan for themselves.
What makes up your monthly payment?
Interest – the fee for borrowing money from the bank. Paying this does not reduce the amount of your outstanding mortgage balance
Taxes – local property taxes which are lumped in with your monthly loan payment and collected in an escrow account to be taken out when taxes are due.
Insurance – homeowners and hazard insurance which are also collected on a monthly basis and collected in an escrow account to be paid when premiums are due.
Hopefully this article has helped you to understand the mortgage process a little better and reduced the amount of anxiety associated with the home buying process. It may be easier than you think to own your own home! To view the full article from Wells Fargo Home Mortgage click here.
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Home Run Real Estate Team