Fixed Rate - The interest rate and term of the loan are negotiated and set for the life of the loan. Can range from 10-40 years.
Adjustable Rate - The interest rate is fixed for an initial period (usually 1, 3, or 5 years), after which it adjusts in intervals based on the market index.
Points - Points are fees paid to a lender up front in exchange for a lower interest rate on a loan. This is known as a “buydown”. Each point equals 1% of the loan amount.
Loan-to-Value Ratio - LTV is the ratio of a loan to the value of the home being purchased. Typically an 80% LTV requires a 20% downpayment.
Origination Fee - Borrowers pay an origination fee to the lender. This may include application fee, appraisal fee, fees for all the follow-up work, and other costs associated with the loan.
Private Mortgage Insurance (PMI) - When the loan amount is greater than 80% of a home’s value, the borrower pays for PMI to guarantee the lender is covered if the borrower defaults.
Appraisal - Conducted by a licensed appraiser who gives a value estimate on the home based on a physical inspection and comparable properties.
Closing Costs - Costs that the buyer must pay during the mortgage process, including attorney fees, recording fees, and other costs associated with the closing.
Down Payment - The amount of the home purchase price that the buyer is paying up front. Generally, lenders require a specific down payment in order to qualify for the mortgage.
Escrow - At the closing of the mortgage, borrowers are required to set aside a percentage of the yearly taxes to be held by the lender, as well as make monthly payments for taxes on the home - all in an escrow account. The account is maintained by the lender responsible for sending the tax bills on a regular basis.
Title Insurance - A requirement which ensures that the home’s title is free and clear of any liens (taxes). Since the lender is using the home as collateral for the mortgage transaction, they need to be certain that the title of the property is clear.
Preapproval - A preapproval looks at the following items and gives you a starting point for how expensive of a property you should be looking at:
● Credit score
● Income information (paystubs and W2’s/tax returns) ● Debts (student loans, credit cards, car loan)
● Proof of funds for down payment+
There is a difference between what you can afford and what you are comfortable paying. Getting preapproved with a lender will help you iron out that difference.
What makes up my monthly payment?
● Principal and Interest
● Property taxes
● Homeowners insurance
● If needed, mortgage insurance (see PMI on page 1)
What determines my rate?
● Credit score
● Down payment amount or Loan to Value ratio
● Property type (condo vs. single family home)
What is Needed to Build an Offer?
● Offer Price
● Knowledge of other offers, time on market, preapproval
● Comparable Properties
● Closing date
● Preapproval Details
● Earnest Money (Deposit to show you are a serious buyer)
● Tax Info
● Attorney Review Period
● Any home furnishings or items you’d like included
After the offer is accepted, attorneys are brought in to the conversation and we begin a five to seven day period during which the inspection and appraisal take place and the full amount of earnest money is delivered (usually 5% of the total price).
● Inspection: First step in attorney review . A licensed inspector visits the home and does a thorough examination for any defects that may need to be addressed in the negotiation, paid for by the buyer (usually around $200).
● Appraisal: A licensed appraiser visits the home and does a general inspection. They use the inspection, along with comparable properties, to determine value.
Closing Costs (due at closing):
● Lender fee
● Appraisal fee
● Title fees
● Transfer taxes (Chicago only)
Prepaids (due at closing - goes towards loan):
● Escrow set up - To make sure there is enough in your escrow account when a bill comes.
● Prepaid interest - From the day you close to the first of the next month, don’t have payment the first month after closing.