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Mortgage Financing Terms

What does APR mean?

Annual Percentage Rate (APR) -- Represents the actual note rate of the borrower's loan at the time of the application plus points and certain closing fees added and re-calculated as if they were interest, and were computed on an annual basis. The APR is i ntended to give consumers a standardized basis to compare the costs of borrowing from different lenders. It is not the actual note rate that will be used to determine the borrower's monthly principal and interest payment.

How to use APR for comparison:

Is there a wide spread between the APR and the actual note rate? Has a lender has quoted an unusually low note rate, but the APR on the truth in lending statement is equal or higher than the APR stated by competing lenders? Either of these scenarios indicate that a lender might be charging higher points and closing fees to offset a lower note rate.

What are points?

Points are a one-time, up-front fee charged by the lender to originate the loan. 1 point equals 1 percent of the loan amount.

What is PMI?

PMI or "private mortgage insurance", also called "mutual mortgage insurance", is an insurance policy that insures the lender for loss that might occur due to foreclosure on a loan that exceeds 80% of a property's value. PMI does not insure the borrower from loss. A premium is paid as part of the buyer's closing costs equaling one year of coverage, and a three month impound of monthly premium is usually also charged. PMI may require that borrowers maintain a minimum of two months cash reserves in their bank account, and additional sums may be impounded through escrow pursuant to the requirements of the lending institution or the PMI company.

What do the other figures on the "truth-in-lending" statement mean?

Finance Charge -- Represents the total interest that would be paid if the loan were repaid over the full contact term (usually 30 years). Points, and certain closing fees paid to originate the loan as specified by Regulation Z are also included in this total.

Amount Financed -- Represents the dollar amount of the borrower's loan less points and certain closing fees as specified by Regulation Z. This figure is not the loan amount. Again, a wide spread between the actual loan amount and the amount financed could indicate higher points and closing fees.

Total of payments -- Shows total dollar amount that would be paid if the borrower makes all the payments required for the full contract term (usually 30 years).

Good Faith Estimate -- Lists fees that are charged to process, approve, and make the mortgage loan.It is a federal requirement that every lending institution send out a good faith estimate (Regulation Z) within three days of the loan app