Mortgage Terms to the Letter
Learn the language of loans before you buy a home.
Every industry has jargon. Home lending is no exception. When you decide to purchase a home, it’s not enough that you’re venturing into the land of contracts, appraisals, inspections, and title binders. Nope, you are suddenly facing a slew of acronyms that may mean nothing to you now, but are oh-so-important to understanding your home loan. Fear not! Let’s demystify DTI and show APR who’s the boss.
ARM
There are two main types of mortgages in the US: The fixed rate mortgage and the adjustable rate mortgage (ARM). Interestingly, no one ever calls a fixed rate mortgage a FRM, but we digress. There are advantages to each type, depending upon your specific situation, but at the most basic level, the fixed rate loan has an interest rate that is stable over the life of the loan while the ARM will adjust after the first 3, 5 or 7 years (typically). Your licensed CrossCountry Mortgage loan officer will help you decide which type of loan is best suited to your goals and finances.
P&I
This sounds like a utility company or grocery store, but it stands for principal and interest. These are the two most important components of your monthly mortgage payment, and represent the money you pay back for the loan you took out. The most common type of loan is a fixed rate loan, in which most of the money goes to interest in the first years. This gradually shifts over the life of your loan until you are paying more in principal than interest.
PITI
Don’t feel sorry for yourself; you may be able to figure this out from the section above. Principal, interest and what else? Taxes and insurance! The other two major components of your monthly mortgage payment are property taxes and homeowners (aka hazard) insurance. These are usually escrowed (collected and held in an account) by the loan servicer and paid to the appropriate taxing body (or bodies, depending upon your locale) and insurance company when due. Show you’re in the know and pronounce it by saying each letter separately.
APR
This is the all-important Annual Percentage Rate and it’s not the same as the interest rate. Why is it different? The APR covers more than the interest on the principal you are borrowing to pay for the property you are buying. It includes everything you are financing with your loan, such as fees, points (money you can pay to reduce the loan rate) and closing costs. When you want to compare loans, the APR is your real measuring stick. Don’t just rely on an interest rate. Make sure the loans cover the same items and compare APRs.
PMI
Here’s another item that will affect the APR: Private Mortgage Insurance (PMI). Lenders are banking on you paying your mortgage, but if you make a down payment of less than 20 percent on a conventional loan, there’s a higher risk of default. Lenders require PMI to protect them from a loss if you can’t pay your mortgage. PMI is usually included in your monthly home loan payment as a separate line item. The good news? PMI does not have to be a permanent part of your loan. Once you have at least 80 percent equity in your home, you can ask to have the PMI cancelled. Federal Housing Administration (FHA) loans require a different kind of mortgage insurance in the form of an upfront premium and a monthly premium. The monthly premium continues for the life of the loan and the only way to end it is to refinance to a non-FHA loan.
LTV
How much are you borrowing compared to the appraised value of the home you are buying? That’s loan to value. As you’ve seen above, there’s a lot riding on this. If you borrow more than 80 percent of the value, you’ll pay PMI on your loan.
DTI
This is one more measure of how much you can borrow. Lenders look at your existing debt (such as credit cards and car loans) and your income, and derive your debt to income ratio. Lenders want to be confident that you can handle your existing debt and your new home loan. If you are carrying a heavy debt load, you will find that you may not be able to borrow as much as you’d like, or you may not be able to qualify for a loan at all.
Help! I need a translator
Guess what? You don’t have to memorize everything you’ve read. When you need someone who speaks fluent mortgage, contact your licensed CrossCountry Mortgage loan officer, who will gladly help you understand the language of loans.