Mortgage Language – What Does it All Mean?
Headlines excitedly announcing historically low mortgage interest rates are welcome news to prospective buyers counting on additional buying power. Sellers are happy too because their pool of buyers expands as more people take advantage of sub four percent rates. But there is much more to know than just a number. To be an informed borrower, it’s good to know a little lending language. Here are a few terms to get you started:
Interest Rate – the amount charged by a lender to borrow. These rates are typically noted in annual terms called the annual percentage rate.
Amortize – to pay off debt with a fixed repayment schedule in regular installments over time.
Mortgage application – the document submitted when applying to borrow money to purchase real estate.
Pre-Approval – a term used to mean a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. Note, it is not as binding as pre-qualified, see below.
Pre-qualified – the loan officer's written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings.
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 amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.
Some acronyms might get thrown your way as well. Be familiar with these.
FICO – this refers to your credit score which will be critical to the process. Lenders use your score to assess your credit risk; the higher the score, the lower the risk. It stands for Fair Issac Corporation, the creators of the FICO score.
LTV – this stands for loan to value ratio which looks at the difference between the amount of money a borrower is seeking vs. the value of what the borrowers wants to buy with that money. For example, if you want to buy a $200,000 home and borrow $190,000, that’s a high LTV. Assessments with high LTV are seen by the lender as riskier.
DTI – this terms means debt to income ratio. DTI is a percentage which reflects your ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income.
These terms are just a few you might encounter. Never fear, ask questions and your lender and REALTOR® will walk you through all you need to know.
Sources: Investopedia, realestateabc.com, Keith Bergfeld of Open Mortgage