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If you're getting a mortgage, especially if you're a first time home buyer, all the language in your mortgage paperwork can be a bit daunting. After all, unless you're a real estate attorney, mortgage broker or work in the mortgage division at your local bank, they're not terms you run across in your everyday life. Here is a brief glossary on some mortgage terms you should know, such the all important good faith estimate.

Mortgage Terms - Good Faith Estimate
The good faith estimate in your mortgage paperwork was mandated by Congress in 1974 as part of the Real Estate Settlement Procedures Act (RESPA). This was done in part to limit the rampant process of many supposedly impartial third parties in the mortgage process getting kickbacks for such things as title insurance. The good faith estimate give the prospective borrower a complete list of all the fees and rates associated with the loan.

These mortgage fees and charges are categorized according to a number. The number corresponds to the same number on HUD forms and gives an indication as to the type of charge or fee. The classifications are in 100 number increments, and there are many different items you may find within each classification.
800's – payable in connection with the mortgage

900's – must be paid in advance

1,000's – paid into a reserve with the lender

1,100's – title charges

1,200's – government charges for recording and transfer

1,300's – anything else

Keep in mind that it is called an estimate for a reason. Good faith estimates can and do change, often in the 11^th hour. So keep in mind that although you have a good faith estimate in your hands, it may not be the actual mortgage you end up with.

Mortgage Terms – Appraisal
This is a professional opinion of a properties value. Appraisals are performed, appropriately enough, by a real estate appraiser, who takes into account things such as the properties location, the type of structure and the surrounding neighborhood. One of the key elements used to determine the value of your property or one that you are looking to buy, is the recent selling price of similar properties that are close by. These are known as “comps” in the real estate world. In most cases the buyer must pay for the appraisal. The results of the appraisal are typically reported on a Uniform Residential Appraisal Report form.

Mortgage Terms – Annual Percentage Rate (APR)
APR is one of the most misunderstood terms associated with a mortgage. It is actually a number intended to make comparing mortgage rates easier. When comparing a mortgage, an apples to apples comparison is often very difficult due to the plethora of fees and charges that are tacked on. When the effect of these additional moneys are taken into account, the effective interest rate changes because you're financing more than just the home's price.

As with the good faith estimate, the APR is required by law to be disclosed to the borrower. Although it is better than nothing, the APR still fails to give buyers the one, easy to compare number that it was intended to. This is mostly because there isn't a standard for which fees and charges must be included when calculating the APR. It is a good starting point for comparisons though, and better than nothing. Keep in mind that the APR calculations are dependent upon the term of the mortgage so different length mortgages cannot be compared using the APR. For example, the APR of a 15 year mortgage cannot be directly compared to the APR of a 30 year loan.

Mortgage Terms – Acceleration Clause
This is a clause in the mortgage that allows the lender to accelerate the repayment of the loan. In most cases it allows the lender to demand the entire outstanding loan balance. This provision is usually invoked if the applicant defaults on the mortgage or is found to have provided false information in order to get the loan.

Mortgage Terms - Earnest Money -
Earnest money is given by the buyer to the seller to prove they are serious about wanting to buy the property. It is basically a deposit. Earnest money will be delivered to the sellers along with a formal offer to purchase the property. It is usually 1% to 2% of the selling price. Earnest money deposits are helled a trust account and are used as part of the down payment if the trans action goes to fruition. In the event the deal falls through, any cancellation fees are taken out of the deposit before it is returned to the buyer.

Mortgage Terms – Points
Points are equal to 1% of the loans amount and are used to effectively “buy down” the interest rate in the case of discount points, and pad the lender's pockets in the case of origination points. You will often see the term in ads for mortgage rates. In this case they are referring to discount points. If you see an ad the offers a mortgage at 5.75% with 1 point it means that you would be paying an additional 1% of the loan's value in order to receive a lower interest rate. For example, if the mortgage amount was $250,000, 1 point would equal an additional $2,500.

Points are prepaying the lender interest, rather than making them collect it over the term of the loan. So, in exchange for paying the additional $2,500, you would get a lower interest rate, typically about 1/8 of a percentage per point. Points will lower the monthly mortgage payment at the expense of additional up front money. It will take some years to make up the additional money, so you'll have to determine weather or not it makes financial sense for you.

Stay tuned for more mortgage terms soon. Have a great, Debt Free week. Go Cougs, beat NC!!