As I speak with clients, particularly first-time real estate buyers I get to understand where knowledge gaps exist. I often field questions regarding fundamental aspects of mortgage financing. This post will be dedicated to helping clarify some terms and general concepts related to mortgage financing...
In this post we will limit the discussion to fixed-rate, constant payment mortgage loans; those typically obtained for single-family residences.
A mortgage is a transaction created when one party pledges real property to another party as security for an obligation owed (usually re-payment of a loan).
A promissory note is signed with the mortgage as a document that creates a the obligation to repay the loan and spells out the details (interest rate, term, payment frequency, etc.). The "note" and the mortgage are actually two distinct documents (usually).
Are you "personally liable." If so, that means that not only is your property pledged to secure payment of the "note" but your other personal assets can be sold to re-pay the balance due on the note. In most states there is a distinct process post foreclosure to obtain this lien; often referred to as a deficiency judgment.
The APR is the annual percentage rate and this is commonly referred to as your "interest rate." Per the Truth-in-Lending Act, the APR must be disclosed to the consumer by the Lender.
The "Mortgagor" is you and the "Mortgagee" is the lender.
The following are the scariest words in the mortgage process; CLOSING COSTS!!! What are these vile things? There are 3 categories; statutory, 3rd party and additional finance charges. Statutory costs are those that cover the legal requirements of transferring property as set by the governing body...3rd party costs are fees to pay service provider like the appraiser, inspectors, title companies, etc...and additional finance charges are the banks way of making money. The additional charges can be called loan fees, loan origination fess and are generally fixed costs charged to borrowers.
"POINTS" or discount fees are charges from the bank to the borrower that enable the bank to raise the yield on the loan. In effect, assuming the loan is paid off early, points will make the borrowing costs exceed the APR. 1 point is usually equal to 1% of the loan. Essentially points allow the lender to lend less then the borrowed amount but the borrower actually pays back the full amount.
Pre-Payment Penalties: are fees for paying off a loan early, usually when you sell your house and use the proceeds to pay off the mortgage. Most mortgages require the mortgagor to pay the loan off in full if the property is transferred (sold); this is called the due-on-sale clause. I believe that FHA loans do not have pre-payment penalties.
Here's some solid reads on mortgages:
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