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Know your mortgage terms

By Times Staff Writer
Published July 31, 2005

Down payment - The percentage of the purchase price paid in cash. Higher down payments are associated with lower interest rates.

Escrow - Most lenders require borrowers to include in each monthly payment one-twelfth the cost of real estate taxes, homeowners insurance and flood insurance. The money is held in an escrow account until the bill is due.

No-doc or low-doc loan - Some lenders offer loans with little or no documentation, which means you don't have to provide proof of income and assets. However, these loans may require a better credit rating or involve higher interest rates.

PMI - Private mortgage insurance is a monthly charge that is typically required on a loan when the down payment is less than 20 percent of the home's value. However, lenders have found a way around this by pairing a home equity loan with the cash down payment, keeping the first mortgage at 80 percent.

Points - Also known as origination or discount points, each point is 1 percent of the purchase price. Points are considered prepaid interest. By paying points at closing, you get a lower interest rate over the life of the mortgage.

Prepayment penalty - A financial penalty that applies when you refinance your house or pay off your mortgage before it is due. Look for a mortgage that doesn't have one.

Seller financing - The seller holds the mortgage and allows the buyer to make payments to them instead of a bank. Sometimes used as secondary financing on top of the first mortgage held by a bank.

Subprime - The mortgage market for borrowers with poor credit, who are shut out of the prime market and pay higher interest rates. Also known as nonprime. Generally for those with credit scores below 620.

[Last modified July 29, 2005, 18:26:02]