No industry loves their jargon and acronyms more than the mortgage industry. Picture this: you're sitting across from your mortgage advisor, nodding along as they rattle off terms like 'APR,' 'LTV,' and 'PMI' like they're speaking a different language. Sound familiar? Don't worry, you're not alone.
We’ll clarify some of the most commons terms you’re likely to hear when buying a home. Whether you're a prospective homebuyer, someone looking to refinance, or a seasoned investor looking to brush up on your knowledge, this guide aims to be your comprehensive resource for unraveling the complexities of mortgage jargon.
ARM: Adjustable-Rate Mortgage
A mortgage loan with an interest rate that adjusts over time based on a specified index. Today the index used is typically the Secured Overnight Financing Rate (SOFR).
APR: Annual Percentage Rate
The APR is expressed as a percentage that represents the yearly cost of your funds. It includes the interest rate plus costs associated with the loan. Costs like points, processing fees, and other charges that you pay to get the loan.
Amortization (or amortization period)
The amortization period is the length of time it takes to pay off a mortgage in full. For example, a 30 year fixed mortgage has an amortization period of 30 years.
Appraisal
A written opinion of a property’s current market value. It is prepared by a licensed or certified residential appraiser.
CD: Closing Disclosure
The Closing Disclosure provides the final details of the mortgage loan you have chosen. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and costs.
DTI: Debt-to-Income
Your debt-to-income ratio (DTI) is calculated by dividing your monthly payments (house, car, credit cards, etc.) by your gross monthly income. This number is one of the ways lenders ensure your ability to repay your mortgage.
Escrow
Escrow accounts are used to collect and pay property taxes and insurance payments on a home. Including your taxes and insurance with your monthly mortgage payment is an easy way to budget and ensure timely payments are made.
HUD: Housing and Urban Development
The Department of Housing and Urban Development is a U.S. government agency. The Federal Housing Administration (FHA) is part of HUD. The FHA administers mortgage insurance programs that help families become homeowners by lowering some of the initial costs of their mortgage loans.
LE: Loan Estimate
The Loan Estimate tells you important details about the loan you have requested. It is sent to you within three business days of when you apply for a mortgage loan.
Loan Programs
FHA: Federal Housing Administration
VA: Department of Veteran Affairs
USDA: United States Department of Agriculture
HELOC: Home Equity Line of Credit
LTV: Loan-to-Value
LTV is a percentage calculated by dividing your loan amount by the purchase price or appraised value of your home.
PMI: Private Mortgage Insurance
Private Mortgage Insurance protects the lender against a loss if a borrower defaults on the loan. The benefit for many homebuyers is it can help them buy a home sooner. It allows down payments to be as little as 3% down instead of requiring 20% or larger down payments to purchase a home.
PITI
PITI stands for principal, interest, taxes, and insurance.
Points
A borrower can pay points to reduce the interest rate of a loan. One point equals one percent of the loan amount.
Rate Lock
A rate lock on a mortgage loan means that your interest rate won't change between the offer and closing, as long as you close within the specified time frame and there are no changes to your application. Mortgage interest rates can change daily, sometimes hourly.
Title Insurance
Owner’s title insurance protects the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it. Most lenders require you purchase a lender’s title insurance policy, which protects the amount they lend. You may want to buy an owner’s title insurance policy, which can help protect your financial investment in the home.
Underwriting
It's the process a lender uses to take an in-depth look at your credit and financial background to determine if you're eligible for a loan.
Getting a mortgage can feel like trying to understand a foreign language. Northpoint Loan Officer’s pride themselves on helping you understand your options and make informed decisions on your home financing journey.
We know we cover a lot in this blog, but we hope it’s helped clear up some confusion! Never hesitate to reach out to your Northpoint Loan Officer with any and all questions you have before, during and after buying a home!