What is PMI?

PMI stands for Private Mortgage Insurance. It is an insurance required by your lender for buyers to hold when they obtain a loan with a small down payment. Payments are made monthly and are wrapped up in your monthly mortgage insurance. Lenders require to the insurance because it will reimburse the lender in the event that you default on your loan and a foreclosure sale does not cover the cost of a loan.

Does it make sense to pay more points for a lower interest rate?

It depends on how long you intend to own the house. One point is equal to one percent of your loan amount. So in order to buy four points if you are borrowing $200,000 you must pay $8,000. Each point, depending on your lender, will earn you a set discount on your loan interest rate. In other words, the more points you buy the lower your interest rate will be. Let's continue with this example. If your lender offered a 1/4% discount on your interest rate with each point bought and your initial interest rate was 6% and you decided to buy four points your new interest rate will be 5%. With a drop in 1% on a $200,000 loan you will save roughly $2,000 per year. Your initial investment of $8,000 to buy four points will then be worthwhile if you decide to own your house for more than 4 years not taking into account inflation or loss of cash on hand for any other types of interest yielding investments.

What is APR?

APR stands for annual percentage rate. The purpose of disclosing an APR as opposed to an interest rate is to give borrowers a more realistic view of the costs of their loan over time. APR takes into account closing costs and fees and factors them over the life of the loan along with the interest rate.

What is a pre-payment penalty?

A pre-payment penalty is a penalty paid (usually interest over a set period of time) out to the lender when a borrower pays back a loan before a previously agreed upon amount of time, usually somewhere between two to five years. Not all loans have pre-payment penalties and your mortgage consultant should make you completely aware of the fact if your loan does have one and it should be stated in the loan disclosures if there is one. Usually loans with pre-payment penalties will have lower interest rates.

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