Know the numbers
When a lender hands you an estimate, it comes with a list of terms and charges. Here is what the common ones mean. There are no dollar amounts or rates on this page, because they change constantly and vary by lender. The real figures are on your lender’s written estimate.
Credit report
With your permission, the lender orders a report on your outstanding loans and your repayment history from a credit agency. There is usually a small charge for it.
Application or processing fee
This covers the lender’s work in evaluating whether you can repay the loan. Some lenders credit it back to you at closing, so ask.
APR
The annual percentage rate is the cost of borrowing expressed as a yearly rate, with certain fees folded in along with the interest. That is why the APR comes out a little higher than the interest rate you were quoted. It is the better number for comparing two loans, as long as both are the same type and term.
Indexes
On an adjustable loan, the rate resets from time to time based on a published financial index. Ask the lender which index your loan follows and how much gets added on top of it.
Points
Points are interest you pay up front, calculated as a percentage of the loan amount, in exchange for a lower rate. Whether they are worth paying depends mostly on how long you keep the loan, and your lender can work out the break-even for you. Ask a CPA how points are treated on your taxes.
Appraisal
The lender hires an appraiser, usually an independent one, to compare the property’s price, condition and size with recent sales nearby. It protects the lender from lending more than the property would bring if they ever had to sell it after a default, and it protects you a little from overpaying. The cost varies with the property and the type of appraisal, and the borrower normally pays it.
Miscellaneous fees
Expect a number of smaller charges connected with processing the loan, which can include notary, courier and county recording fees.
Prepayment penalties
Some loans charge a penalty if you pay them off early by refinancing or selling. These vary widely. Before you commit, find out whether your loan has one, how much it is, and how long it applies.
If a line on your estimate is not covered here, ask the lender to explain it until it makes sense. Then the next step is to get pre-approved.