20 Important Mortgage Terms You Need To Know
When you are ready to purchase a home, it is important to compare mortgage loan products to get the best deal possible. But it is also important to understand the terminology used in mortgage lending, so you can make an informed decision about your home buying process. This guide outlines some of the most common mortgage terminology used in the residential mortgage industry, such as points, loan estimates, APR, and more. Get familiar with these key mortgage terms and make sure you understand them before signing on the dotted line.
The first key mortgage term we’ll look at is amortization. It refers to the process of paying off your mortgage loan in scheduled payments over a given period of time. Typically, mortgages are amortized over a 15 or 30-year term. A fully amortized loan is one that has been paid off in full by the end of the amortization period, while a partially amortized loan is one that has not.
An appraisal fee is what you pay to have a licensed real estate appraiser inspect the property, compare recent sales, and determine the current market value of the property. Your lender often picks the appraiser and determines the appraisal fee.
Another valuable mortgage term definition is APR. Also known as the annual percentage rate, APR is the cost of borrowing money which includes interest rate and other fees. This can help you compare different loan products to determine which one has the lowest overall cost.
Closing costs are one-time fees that must be paid during the process of securing your mortgage. These include things like appraisal fee, title search fee, origination cost, and several others.
Debt-to-Income (DTI) Ratio
Debt-to-income ratio, or DTI, is a measure that lenders use to determine how much of your income is taken up by existing debts. It is calculated by taking your total monthly debt and dividing it by your gross monthly income. It tells how easily you can manage your debt obligations. For instance, if your gross monthly income is $4,000 and your total monthly debt is $2,000 then your DTI ratio will be 50%. Most lenders prefer a DTI ratio of 43% or less although they can be flexible.
The down payment is the amount of money you must pay upfront when purchasing a home. It is usually expressed as a percentage of the purchase price. The higher your down payment, the lower your interest rate will be. Different types of mortgages have different minimum down payment rates.
The next term mortgage definition is earnest money. Earnest money refers to the deposit made by the buyer of a home to show that they are serious about purchasing the property. This deposit can be applied towards closing costs or other expenses associated with the transaction.
Your lender may provide an escrow account to pay some fees related to your property like taxes and homeowners insurance. Escrow deposits are held in a separate account so that the funds can be disbursed when due. Part of your monthly payments go into this account.
A loan estimate is a three page document that provides detailed information about your loan, such as the estimated fees and closing costs, interest rate, and other terms of the loan. This document makes it easier to compare different mortgages.
Loan-to-Value (LTV) Ratio
The loan-to-value ratio is the amount of your loan divided by the value of the property. This is expressed as a percentage, and lenders use it to determine how much risk they are taking on with a particular loan.
The term mortgage refers to the agreement you sign when you borrow money from a lender to purchase a home. It outlines the terms of the loan and lays out your repayment obligations. A mortgage leaves the lender with the right to repossess the property if you default on your loan.
Mortgage Loan Modification
A mortgage loan modification is a change in the terms of your mortgage to make it more affordable. This could include changes in the interest rate, term, or even principal balance. It is a form of loss mitigation.
Now, what is a mortgage term? The mortgage term is the period of time over which your loan is amortized. Examples of mortgage terms are either 15 years, 20 years, or 30 years. The shorter the term, the lower the interest rate, but you will have to pay more in total interest charges.
PITI stands for principal, interest, taxes, and insurance. These are the four areas of a mortgage payment. It is the total amount of money you will be paying each month to cover your mortgage loan and related expenses.
Another important term to look at in this mortgage glossary is points. Points are fees paid at closing in exchange for a reduced interest rate on your loan. Generally one point is equal to 1% of the loan amount. Points can help you save money in the long run, but it’s important to consider if the savings makes them worth the cost.
Getting preapproved for a loan can make the process of buying a house easier. Pre approval requires you to submit information about your income and credit score to lenders so they can review it and determine if you are eligible for a loan. The preapproval letter shows that a lender or a bank has already approved you for a loan, which can make the process of negotiating and buying a house faster.
The principal is the amount of money being borrowed on a mortgage loan. This does not include interest or other fees associated with the loan. The principal will be paid back over time as part of your monthly payments.
Private Mortgage Insurance
Private mortgage insurance (PMI) is an additional cost included in certain types of loans to protect the lender if you default on your loan. The cost of PMI is typically added to your monthly mortgage payment and it’s often required with a down payment of less than 20%.
If you have an existing loan, you may be able to refinance it in order to secure a lower interest rate or switch to a different type of loan. Refinancing can also help you access additional cash if you want to make improvements on your home or consolidate debt.
Mortgage underwriting is the process of verifying the financial information that you have provided to your lender. They will review your credit score, income and assets to determine if you can afford a loan and whether or not they will approve it. It is a form of risk assessment.
These are just some of the key mortgage terms to know when purchasing a home. Make sure to familiarize yourself with these terms, and research other basic mortgage loan terms that you may need to know as well. Additionally, talk to a financial advisor or mortgage broker for more information and advice. Knowing these important mortgage loan definitions will help make the home buying process smoother and less stressful.
Thrive Mortgage Can Help
Thrive has been helping families achieve their home-buying goals for several years. We understand the importance of understanding common terms used in mortgage lending and are here to ensure you have all the information you need. Contact us today to learn more about our services and how we can help you get the best deal on your mortgage.