As a prospective homebuyer, there are several factors that you must consider before applying for a mortgage. In addition to the type mortgage (fixed-rate, ARM, etc.) and the various mortgage products available, there are certain key terms that the novice homebuyer should understand about the products offered to effectively compare and decide which is best. At a minimum, you should have a general idea about the following:

• Down payment, requirements vary by mortgage. Some lenders offer a 95% LTV which requires a 5% down payment. Under certain programs, many lenders will allow up to 2% of the 5% down payment to come from a gift, a grant from a non-profit organization, or from a federal state or local government agency. Fannie Mae offers a 3% down payment program. FHA offers a 3% down payment on homes selling for $50,000.00 or less.

• A discount point is equal 1% of the loan amount (on a $70,000.00 loan, a point would be $700.00). Discount points can be thought of as prepaid interest because they increase the lender’s yield on loans without raising the stated interest. Each point is approximately 1/8 percent added to the interest rate. For instance, an 8% loan with 2 points is roughly equal to 8 ¼ % loan with no points. The more points required, the more cash is needed at closing because discount points cannot be financed. The fewer points required, the higher the interest rate. Prospective homebuyers must be aware of lenders and brokers that charge excessive points and rates.

• Annual Percentage Rate (APR) is the total yearly cost for the mortgage stated as a percentage rate of the loan amount. The APR is a better source for comparison of mortgage costs than the interest rate alone.

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