Alphabet Soup of Home Loan Terms
The path to buying a home can be a confusing time. The more you research, the more questions you have. Each article you read is littered with terms and acronyms that you don’t understand. You may even feel like you’re in the dark about one of the biggest purchases of your life. It’s easy to understand why this process sometimes feels overwhelming. But we want to bring you back to the light! Below are some key terms that will hopefully help you get a grasp on the alphabet soup that is home buying. And more importantly, help you feel empowered when buying your home!
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in the market. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
An analysis of a buyer’s ability to afford the purchase of a home. This analysis will include things such as: your income, liabilities, available funds, the type of mortgage you plan to use, the area where you're looking to purchase a home, and an estimate of closing costs.
The gradual payment of a loan, where the principal is paid down over the life of the loan according to a schedule, typically through equal payments.
Annual Percentage Rate (APR)
This is basically the true cost of the loan, expressed as a yearly rate including the interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans across different banks and financial institutions as they may all have different fees but the same interest rate.
An estimation of a home’s market value by a licensed individual who bases the value from recent sales of homes in the area.
A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement."
These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area, country, and the lenders used.
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
The current market value of the home minus the outstanding mortgage balance. Home equity is essentially the amount of ownership.
The part of a homeowner's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
Fixed-Rate Mortgage (FRM)
A mortgage where the interest rate is fixed throughout the entire term of the loan.
The fee charged for borrowing money. Note that this is different than the APR as the interest rate does not include mortgage fees incurred.
Loan-to-Value (LTV) Percentage
The relationship between the home loan amount and the appraised value (or sale price if it is lower) of the property. For example, a home valued at $100,000 with an $80,000 mortgage has an LTV of 80 percent.
A lender’s promise to hold a certain interest rate, including loan term and points, usually for a specified period of time. This is meant to cover you for the time period while your loan application is being processed and you’re preparing for the closing on the house.
A contract that insures the lender against loss caused by a homeowner's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.
The process of determining how much money you will be eligible to borrow before you apply for a loan.
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
Paying off one loan with the proceeds from a new loan using the same property as security. This is typically done to either shorten the mortgage loan term or to receive a better interest rate if they've gone down.
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.
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