Question 1

What is Annual Percentage Rate (APR)?

Accepted Answer

The total cost of borrowing money on an annual basis, including the interest rate plus other fees and costs. APR is typically higher than the interest rate alone and provides a more accurate picture of your total loan costs. Formula: APR accounts for: Interest Rate + Loan Origination Fees + Discount Points + Mortgage Insurance + Other Lender Fees. Example: A mortgage with a 6.5% interest rate might have a 6.8% APR when closing costs, points, and other fees are included..

Question 2

What is Private Mortgage Insurance (PMI)?

Accepted Answer

Insurance that protects the lender if a borrower defaults on their loan. Required for conventional loans when the down payment is less than 20% of the home's purchase price. PMI can be removed once you reach 20% equity. Example: On a $500,000 home with 10% down, PMI might cost $200-300/month and can be removed once you owe less than $400,000..

Question 3

What is Debt-to-Income Ratio (DTI)?

Accepted Answer

A percentage that compares your monthly debt payments to your gross monthly income. Lenders use DTI to assess your ability to manage monthly payments and repay borrowed money. Most lenders prefer a DTI below 43%. Formula: DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100. Example: If you earn $8,000/month and have $2,400 in monthly debt payments (mortgage, car, student loans), your DTI is 30%..

Question 4

What is Loan-to-Value Ratio (LTV)?

Accepted Answer

The ratio of the loan amount to the appraised value or purchase price of the property (whichever is lower). LTV is a key factor in loan approval and determines whether PMI is required. Formula: LTV = (Loan Amount ÷ Property Value) × 100. Example: A $400,000 loan on a $500,000 home equals an 80% LTV ratio. Below 80% LTV typically eliminates PMI requirements..

Question 5

What is Discount Points (Points)?

Accepted Answer

Prepaid interest paid at closing to reduce the interest rate on your mortgage. One point equals 1% of the loan amount and typically reduces the interest rate by 0.25%. Points can be tax-deductible. Formula: 1 Point = 1% of Loan Amount | Rate Reduction ≈ 0.25% per point. Example: Paying 2 points ($10,000) on a $500,000 loan might reduce your rate from 7% to 6.5%, saving approximately $1,750/year in interest..

Question 6

What is Pre-Approval?

Accepted Answer

A lender's written commitment to lend you a specific amount based on verified financial information. More thorough than pre-qualification and demonstrates serious buyer intent to sellers. Example: A pre-approval letter for $750,000 shows sellers you're qualified and ready to purchase in that price range..

Question 7

What is Pre-Qualification?

Accepted Answer

A preliminary assessment of how much you might be able to borrow based on self-reported financial information. Less thorough than pre-approval and not a commitment from the lender. Example: A pre-qualification might estimate you can borrow $600,000-$700,000, but it's not verified and doesn't carry the same weight as a pre-approval with sellers..

Question 8

What is Gift Funds?

Accepted Answer

Money given by a family member or other acceptable donor to help with down payment or closing costs. Must be documented with a gift letter and proof of transfer. Cannot be a loan. Example: Your parents gift $50,000 toward your down payment. You provide a gift letter stating it's a gift (not a loan) and show bank statements proving the funds were transferred..

Question 9

What is Gift Letter?

Accepted Answer

A document required by lenders when using gift funds for down payment or closing costs. Must state the gift amount, donor relationship, that it's a gift (not a loan), and that repayment is not expected. Example: Your gift letter states: "I am gifting $50,000 to [your name], my son/daughter, for the purchase of [address]. This is a gift with no expectation of repayment.".

Question 10

What is Amortization?

Accepted Answer

The process of paying off a loan through regular payments over time. Each payment covers both principal and interest, with early payments weighted heavily toward interest. Formula: Monthly Payment = P[r(1+r)^n]/[(1+r)^n-1] where P=principal, r=monthly rate, n=number of payments. Example: On a $500,000 30-year mortgage at 6.5%, your first payment might be $2,800 interest and $360 principal, while year 20 payments are more balanced..

Question 11

What is Rate Lock?

Accepted Answer

An agreement between a borrower and lender that guarantees a specific interest rate for a set period, typically 30-60 days, protecting against rate increases during the home buying process. Example: Locking in a 6.5% rate for 45 days protects you if rates rise to 7% before closing, but you won't benefit if rates drop..

Question 12

What is MassHousing Loan?

Accepted Answer

Affordable mortgage products offered by MassHousing, Massachusetts' housing finance agency. Features competitive rates, low down payments, flexible guidelines, and potential down payment assistance for first-time buyers. Example: MassHousing might offer a 6% rate when conventional loans are at 6.5%, plus up to $50,000 in down payment assistance for eligible buyers.. This is particularly relevant for Massachusetts home buyers.

Question 13

What is Appraisal?

Accepted Answer

A professional assessment of a property's market value conducted by a licensed appraiser. Required by lenders to ensure the home is worth the purchase price and loan amount. Example: If you're buying a home for $650,000 but the appraisal comes in at $625,000, you may need to renegotiate or bring an additional $25,000 down payment..

Question 14

What is Equity?

Accepted Answer

The difference between what your home is worth and what you owe on your mortgage. Equity increases as you pay down your loan and/or as your property value appreciates. Formula: Equity = Current Market Value - Outstanding Mortgage Balance. Example: If your home is worth $600,000 and you owe $450,000, you have $150,000 in equity (25%)..

Question 15

What is Comps (Comparable Sales)?

Accepted Answer

Recently sold properties similar to the subject property in location, size, age, and features. Used by appraisers and agents to determine market value. Example: For a 2,500 sq ft colonial in Winchester, MA, comps would be similar colonials sold in Winchester within the past 3-6 months..

Question 16

What is Comparative Market Analysis (CMA)?

Accepted Answer

A report prepared by a real estate agent that compares a property to similar homes recently sold, pending, and active on the market. Used to determine an appropriate listing or offer price. Example: A CMA might show that similar Winchester homes sold between $650,000-$725,000, helping you price your offer at $680,000..

Question 17

What is Escrow?

Accepted Answer

A neutral third party (often an attorney in Massachusetts) that holds funds or documents until conditions of a transaction are met. Also refers to an account where lenders hold funds for property taxes and insurance. Example: Your earnest money is held in escrow until closing. Your lender may also collect 1/12 of annual taxes and insurance monthly into an escrow account..

Question 18

What is Net Operating Income (NOI)?

Accepted Answer

Annual rental income minus operating expenses (excluding mortgage payments and depreciation). Used to calculate cap rate and property value. Formula: NOI = Gross Rental Income - Operating Expenses. Example: Rental income of $72,000/year minus expenses of $22,000 (taxes, insurance, maintenance, property management) equals $50,000 NOI..

Question 19

What is Cash-on-Cash Return?

Accepted Answer

The annual pre-tax cash flow divided by the total cash invested (down payment, closing costs, renovations). Measures the return on actual cash invested. Formula: Cash-on-Cash Return = (Annual Pre-Tax Cash Flow ÷ Total Cash Invested) × 100. Example: If you invest $150,000 (down payment + costs) and generate $12,000 annual cash flow, your cash-on-cash return is 8%..

Question 20

What is P&S (Purchase and Sale Agreement)?

Accepted Answer

The binding contract in Massachusetts real estate transactions that follows the initial offer. Typically signed 7-14 days after offer acceptance with a larger deposit (5-10% of purchase price). Example: After your $700,000 offer is accepted, you sign the P&S within 7 days with an additional $35,000 deposit, establishing binding obligations.. This is particularly relevant for Massachusetts home buyers.

Question 21

What is Title V Inspection?

Accepted Answer

Massachusetts-required septic system inspection for properties not connected to municipal sewer. Must pass Title V to sell the property or obtain occupancy permit. Example: A Winchester property on septic needs a Title V inspection. If it fails, the seller typically must repair or replace the system before closing (cost: $15,000-$40,000).. This is particularly relevant for Massachusetts home buyers.

Question 22

What is Closing Costs?

Accepted Answer

Fees and expenses paid at closing, typically 2-5% of purchase price. Includes loan origination, appraisal, title insurance, attorney fees, recording fees, and prepaid items. Example: On a $700,000 purchase, expect $14,000-$35,000 in closing costs (2-5%), depending on loan type and negotiated terms..

Middleton Transfer Fee

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