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Mortgage Loans

Terms You Need to Know When Getting a Mortgage

Whether you’re buying or refinancing, you may stumble upon mortgage terms that you don’t fully comprehend. The less you understand, the more daunting a home loan can seem. But the process shouldn’t intimidate you.

Our loan experts at Cherry Creek Mortgage are always available to answer your questions and explain unfamiliar terminology. The more you know, the easier it is to make an informed decision.

Here’s a closer look at a few mortgage terms that you may not understand - but should - before proceeding with a loan.

1. Closing Costs

This is a mortgage expense that some first-time homebuyers don’t think about, and they’re often shocked to learn that they must pay closing costs in addition to their down payment.

A down payment is the cash portion a buyer pays when purchasing a home. Closing costs, on the other hand, are fees associated with getting the mortgage. These fees can include attorney fees, title search fees, discount points, and other costs. These costs are paid, along with the down payment, on closing day.

2. Points

Points might be another unfamiliar term when getting a mortgage. There are two types of points: origination points and discount points.

Origination points, also called the loan origination fee, is what some mortgage lenders charge borrowers for originating a loan. A discount point is prepaid interest borrowers pay at closing to lower their mortgage interest rate.

One discount point equals 1% of the loan balance. Each discount point paid at closing typically reduces a borrower’s mortgage interest rate by about 0.25%.

3. Adjustable-Rate vs. Fixed-Rate

An adjustable-rate mortgage makes sense when you plan to live in a home for only a few years and want to take advantage of a lower mortgage rate. These mortgages typically start off with a lower interest rate than a fixed-rate mortgage.

A fixed-rate mortgage has an interest rate that doesn’t change over the life of the loan. The interest rate on an adjustable-rate mortgage, however, resets periodically after an initial fixed-rate period.

Let’s say you choose a 5/1 adjustable-rate mortgage. You will enjoy a fixed-rate for the first five years, and then your interest rate will reset every year thereafter. With each reset, your mortgage rate can increase or decrease based on market conditions.

4. Breakeven Point

Refinancing your mortgage is an excellent way to get a lower interest rate and a lower monthly payment. But if you’re thinking about refinancing, you need to be familiar with your breakeven point. Refinancing creates a new mortgage loan, which unfortunately involves additional closing costs. This cost can range from 2% to 5% of the mortgage balance. Your breakeven point refers to how long you’ll need to keep the new mortgage to recoup what you pay in closing costs.

To illustrate, if you were to pay $3,000 in closing costs, and refinancing reduces your mortgage payment by $250 a month, you’ll need to keep the mortgage for a minimum of 12 months to breakeven.

Bottom Line

Cherry Creek Mortgage understands your desire to purchase a home, and we’re here to help ensure that you find the right mortgage program for your needs, whether you’re looking for a new purchase loan or refinancing a property. 

Contact us and let one of our dedicated loan experts make your home loan dreams a reality.