Owning a home can be intimidating, but you’re not in it alone
"Home is the nicest word there is."
- Laura Ingalls Wilder
Need to know Mortgage Terms
Date Published: Mar 11, 2021
We get it, getting a mortgage can be a complicated and overwhelming process, and the tricky terminology involved such as "amortization" and "escrow" doesn't help a whole lot. That is why we decided to supply you with this handy dandy list of mortgage terms, in alphabetical order, that you will want to learn before diving into that process of securing a mortgage. Let's do this!
Adjustable Mortgage Rate (AMR)
A mortgage rate where the interest rate increases and decreases throughout the term of the loan. Typically, the initial interest rate is fixed for a period of time.
Look familiar? It is not as intimidating as it sounds. This word refers to spreading out the payment of a loan, including the principal, interest and other costs, into periodic or monthly payments. The goal is to pay off a loan at the end of a fixed period
of time. The interest and principal that you pay each month may change as more money goes into the principal with each payment, but your monthly payment will stay the same.
Annual Percentage Rate (APR)
The APR is the total annual costs that come with a loan. Knowing APR plays a big role in comparing the total cost of loans offered by various lenders, which gives you an extra push in picking the best loan for you. Also, the Federal Truth in Lending Act requires all lenders to tell you what the APR for a loan is.
A mortgage type that is more common in commercial real estate than residential, this loan type requires you to fulfill repayment in a lump sum of a loan at the end of the loan period. For example, you have a 12-month loan for $6,000, with a normal mortgage you would have to pay $500 per month to fulfill the loan, but with a Balloon Mortgage you may pay $400 per month leaving a lump sum of $1,200 that you would have to pay when the loan period comes to a close.
Debt-to-Income Ratio (DTI)
This is a tool that is used by lenders, such as Wildfire, to evaluate risk. Your ratio consists of your total monthly payment divided by your monthly income and is usually shown as a percentage. For example, if you make roughly $4,000 per month and you are paying $1,000 in loans per month then you would divide 1,000 by 4,000 to get a DTI of 25%. The lower the DTI the better chance you have of getting approved for that loan.
Yay discounts! These nifty points are points that you can buy to lower the interest rate on your loan, the more points you buy the lower your interest rate is. However, each point is usually around 1% of your loan amount. So, if you are purchasing a $200,000 home then one point will cost you $2,000, in turn, lowering your monthly payment. Here is another example:
- Let's say you are getting a home with a $400,000 mortgage with a term of 30 years and a monthly payment of $2,027 with a 4.5% APR. Now let's say you buy two points with a total cost of $8,000. These two points will decrease your APR to 4% and your monthly payment to $1,910 saving you $42,149 dollars over the 30-year loan term. Not a bad deal huh?
Told you it was a real term. An escrow or an escrow account is the money that is collected by a lender that is used to pay your real estate taxes and insurance, but don't worry. The payments are combined to create one monthly payment that covers both. Escrow can also come into play with your lender paying your Principal, Interest, Taxes, and Insurance or PITI. A lender may hold the funds for PITI in an escrow and make the payments for you.
Loan-to-Value (LTV) Ratio
LTV basically divides the money you are borrowing for a home by the total value of the property. If you have a high down payment, you will have a low LTV ratio and lenders will utilize LTVs to evaluate their risk on supplying you with a mortgage. A high LTV ratio means a higher risk and will increase the loan costs for you. Typically, an LTV ratio of 80% and lower equals a better interest rate for you. For example, a home with an Appraised Property Value (APV) or purchase price of $150,000 and a Mortgage Amount (MA) of $130,000 will result is an LTV ratio of 87%. Here is the formula to calculate LTV Ratio:
MA = Mortgage Amount
APV = Appraised Property Value
These are fees that a lender may charge to cover the costs to process, administer, and prepare documentation for your loan. These fees work as a percentage of your loan amount, typically ranging from 0.5% to 1% of the total loan amount.
Private Mortgage Insurance (PMI)
Think of PMI as insurance for your loan lender. It provides a type of security for your lender in case you miss your monthly mortgage payments and default on the loan. PMI is what you would pay the lender, so it can recover part of its losses, in the event you don't pay your loan back. PMI is usually required when a down payment is under 20% on a purchase. If your mortgage happened to come with PMI, you may be able to get it removed once your loan-to-value ratio reaches a particular level.
This feature of securing a mortgage ensures that your interest rate will not increase between the time of your loan application and loan closing. It works as a commitment from a lender to make sure your interest rate will not change from the time you apply to the time you get your loan all squared away.
This is when a lender makes the decision to grant you a loan or not based on your credit history, employment, assets, and other factors that come into play. After you submit your application for a home loan it will go to a mortgage underwriter, who will check to see if your financial profile matches your lender's guideline and determine an appropriate interest rate, term, and loan. The big thing that comes during underwriting is that it is where your lender will decide if your loan request will be approved or denied.