16 mortgage terms you need to know
From “Amortization” to “PITI” (no, not your underarm) mortgage lingo can be confusing for anyone. Below you will find 16 mortgage terms and acronyms that you need to know before embarking on your mortgage journey — let’s go!
1. PITI (Principal, Interest, Taxes & Insurance)
To be more specific, we’re talking about real estate taxes, homeowner’s hazard insurance, and, if applicable, private mortgage insurance and/or flood insurance. It’s also called your monthly housing expense.
2. PMI (Private Mortgage Insurance)
A “just-in-case” for the financial institution. PMI is something that you, as the borrower, pays so that the mortgage lender (us) can recover part of its losses in case you don’t pay your loan back (we do NOT advise that you do that). Typically, PMI is required when a down payment is less than 20% on a purchase. It is also required if there is less than 20% equity on a refinance… try saying that 5 times fast.
3. APR (Annual Percentage Rate)
The cost of credit on a yearly basis, expressed as a percentage. Lenders are required to disclose APR under the federal Truth in Lending Act and Regulation Z (sounds official, right)? Because it includes certain costs to get the loan, it is usually higher that the interest rate outlined (or stated) in your mortgage note. Knowing APR helps in comparing the true cost of loans offered by different lenders, which will give you the leg up!
4. TILA (Truth in Lending Act)
The TILA requires us lenders to let you know the nitty-gritty of the loan you applied for, such as Annual Percentage Rate, closing cost estimate and other deets, shortly after you apply for a loan. The actual disclosure form is sometimes referred to as the Loan Estimate (LE).
It’s not when you don’t write enough. It’s actually the decision whether to grant a loan to you as the potential homebuyer based on your credit, employment, assets or other factors. During underwriting, the lender determines the appropriate interest rate, term and loan amount to offer you based on the likelihood that you will repay the loan.
6. ARM (Adjustable Rate Mortgage)
A mortgage in which the interest rate is periodically adjusted up or down based on a pre-selected index. ARMs are also known as renegotiable rate mortgages or variable rate mortgages. ARM products have interest rates that may increase after loan consummation (aka when you officially sign the loan paperwork).
7. Amortization (pronounced am-ore-tie-zay-shon)
The repayment of debt with periodic payments to the principal and interest. It’s calculated to pay off the loan obligation at the end of a fixed period of time.
8. Discount points
These points are charged to lower the interest rate on your loan. Borrowers typically pay a fee (anywhere from 0 to 3 points) to lower their interest rate, and each point is equal to 1% of the loan amount. Added perk, these points are tax deductible. So for example, if you pay 0.75% in points on your 30-year, $150,000 mortgage ($150,000 x 0.75% = $1,125) with a 4% interest rate, you’ll lower the interest rate by .125% to 3.875%, thus lowering your payment and leaving more room in your monthly budget to feed that burrito addiction. Don’t forget the guac!
9. DTI (Debt-To-Income ratio)
The ratio, expressed as a percentage, that results from dividing a borrower’s monthly payment obligation on long-term debt by his or her gross monthly income. So if you’re making $3,000 per month but you have to pay $1,000 a month in debts (#studentloans #brandnewcar) then your DTI = 33%.
10. Hazard insurance
An insurance policy insuring against multiple unfortunate events, also called a package policy. There are wide variations in what these policies cover but generally they insure the house and its contents. Don’t end up with the short end of the stick. Double check to see what’s covered. Better safe than sorry!
11. Closing disclosure
Provides the actual costs and terms of your loan, including exactly how much cash you need to bring with on the big day. You’ll receive an early disclosure in the amount of time it takes to work off that chocolate cake, at least three business days before closing and a final closing disclosure one day prior. Patience is a virtue, my friend.
A commitment you get from the lender (us) assuring a specific interest rate or feature for a definite period of time. It protects you, the borrower, from interest rate increases between the time of loan application and loan closing.
13. Origination fee
The lenders unfortunately can’t do all the work for free. It’s the fee charged to you as a borrower to cover processing, administration and loan document preparation. The fee is usually a percentage of the loan amount.
Money collected by a lender as a part of your monthly mortgage payment and used to pay your real estate taxes and insurance obligations. Because it can never be too easy, in some areas this may also be called “impounds.”
15. Flood certification
As part of every loan, one of the steps is to check if your future home is in a flood zone or not. This is determined by the Federal Emergency Management Agency. If your home does fall under a flood risk area, you will need flood insurance.
16. Loan estimate
A summary of the terms of your loan and estimated costs. It’s going to be issued within three business days after your loan application, so you have three days to binge watch your current Netflix obsession while you wait. Don’t forget, processing of your loan starts when you submit the Intent to Proceed form that is issued along with the Loan Estimate.
Feeling confident in your vocabulary? Think you’re ready to take the first steps? Check out some of our Home Loans and get started today.