Definitions of Common Mortgage Terms
New to the mortgage world? The acronyms alone are enough to leave your head spinning. So I’ve compiled a list of common mortgage terms and definitions to help us both. Something that you still don’t understand during your process working with your broker? Don’t hesitate to ask, we are here to help and guide you every step of the way!
Adjustable Rate Mortgage (ARM)
Adjustable rate mortgages feature lower interest rates than fixed-rate home loans. However, after an introductory period of one-to-ten years, the interest rate for these loans resets, or adjusts. That makes them riskier to borrowers than fixed-rate loans. Those who plan to own their homes for more than a few years may be better off with a fixed-rate mortgage, or FRM.
Annual Percentage Rate (APR)
The APR refers to the total cost of borrowing, expressed as an interest rate. That means not just the interest you’d pay. It includes the lender fees as well. The APR’s purpose is to make shopping for a mortgage easier.
Amortization is the repayment of a loan — the allocation of interest and principal as you pay your loan each month. After the interest due is deducted, the remaining amount of your payment goes toward reducing the principal balance. Each month, the balance is slightly lower, so less interest is due. Over time, more and more of your payment goes toward principal, and less is needed to cover interest, until your balance in zeroed and your loan is repaid.
An appraisal is a report prepared by a licensed appraiser. Mortgage lenders require it to determine the value of the property they are lending against.
Ability To Repay (ATR)
The ATR provision of the Dodd-Frank Act requires mortgage lenders to verify that borrowers can afford the payments when they are approved for a mortgage. That means income must be verified.
These are the charges that buyers pay when they purchase property. They may include property transfer taxes, mortgage lender fees, fees to third party providers and to government.
Closing Disclosures (CD)
This is your final set of documents when you close a mortgage. These disclose the terms of your loan and its costs. It should match the most recent Loan Estimate that you received when you locked your interest rate.
Debt-To-Income Ratio (DTI)
This is the relationship between your income and monthly debt payments. It’s your debts like mortgage payments, auto loan payments, student loans, credit cards, etc., divided by your gross (before tax) income. Mortgage lenders typically prefer DTIs under 45 percent.
This is the amount you pay toward your property purchase. For a 90 percent loan, you’d put ten percent of the purchase price down. Some loans require as little as three percent.
The difference between the property value and the total of all mortgage balances against it is called home equity. Over time, you add equity by paying down your mortgage. As the property value increases, you also add to your home equity.
Escrow can mean two things. First, it’s a process through which payments to and from all parties in a real estate are collected and distributed. Down payments, earnest money, closing costs, real estate commissions, etc., all pass through the escrow account. The second definition of escrow is money that your mortgage lender collects with your monthly payment for property taxes and homeowner’s insurance. The lender then pays these on your behalf as they become due.
This is the most commonly-used credit scoring method. You can get a FICO score from any of the three major credit bureaus: TransUnion, Experian and Equifax.
Fixed Rate Mortgage
This is the most common type of home loan. The interest rate is fixed for the life of the loan, so the principal and interest payment does not change. Fixed-rate mortgages, or FRMs, are considered the safest loan when interest rates are rising. However, those who don’t plan to keep their homes more than a few years can benefit from the lower rates offered by ARMs.
This preliminary disclosure replaced the old Good Faith Estimate (GFE). It discloses the terms of a home loan, including its interest rate and the costs involved. You should get one within three days of applying for a mortgage, and updated estimates when there are material changes in your application.
Loan-to-value, or LTV, refers to the relationship between a property’s sales price or appraised value and the amount of loans against it. It’s the mortgage balance / the property value. So a $100,000 house with a $90,000 mortgage against it has an LTV of 90 percent. When there is more than one loan involved, perhaps a first and second mortgage, the calculation is called the combined loan-to-value, or CLTV.
This fee covers the lender charges associated with originating, processing, underwriting and funding a home loan. It is often expressed as a percentage of the loan amount.
Also called “discount points,” these are additional, optional fees that borrowers can pay to reduce, or “buy down” their mortgage rates. Because to get the lowest possible rate, you have to pay higher costs. A mortgage calculator can help you determine if it’s worth paying points to get a lower rate and payment.
This is the amount you borrow. Over time, you pay this off with monthly payments.
Private Mortgage Insurance (PMI)
Mortgage lenders often require borrowers to pay for PMI when they put less than 20 percent down on a property purchase or have less than 20 percent equity for a refinance. This policy protects the lender if you default (fail to repay your mortgage as agreed). When you have at least 20 percent equity, you can often drop this coverage. When you take a government-backed loan like the FHA mortgage, this insurance is called MIP, or mortgage insurance premium.
Title insurance protects you and your lender from legal issues that may pop up that compromise your ownership of a property. For example, if you bought a foreclosure home, and it turns out the lender had no right to foreclose, you might lose your home. Most lenders require that you buy a lender’s policy to protect its interest. You can protect your own equity by also purchasing an owner’s policy.
Current mortgage rates depend on your credit profile, down payment size and type of mortgage. At Acadia Lending Group, we shop around for you to find the best rates to match your personal mortgage DNA. Just sit back and let us do what we do best – find you the lowest rates possible. We hope that this helped you dissect some of the common mortgage terms.