Are You New To Mortgage, Don't Get Confused With These 13 Mortgage Terms
Posted: Apr 16, 2019
If you are buying a house for the first time there may be many things you may not know. Contacting a mortgage lender could be something you have already done. But are you familiar with the terminology that mortgage lenders use? For many, these terms might seem like a foreign language. However, understanding these is very essential if you want to make sure you are making the right decision.
PMI or Private Mortgage Insurance
Most mortgage lenders who contact home buyers tend to charge private mortgage insurance if the down payment is less than 20 percent. While this might increase your monthly mortgage payments, it provides protection to your lender in case you default. However, the good news is that you can get it removed from your loan once your loan balance reaches 78% of your home's value.
LTV or Loan-to-Value Ratio
This is one of the factors mortgage lenders consider while approving mortgages or determining interest rates for borrowers. This ratio is calculated by dividing the amount of your loan by the total value of the property. You can reduce your LTV ratio by increasing your down payment. Any LTV of 80 percent or below can get you a favorable interest rate from a lender who comes to you through mortgage live transfer leads.
ARM or Adjustable Rate Mortgage
This is a type of mortgage wherein the interest rate starts varying after a certain period of time, which may be anywhere between 3 to 10 years. The initial interest rate that you would get on an ARM would be much lower than that of a fixed-rate mortgage. But once the fixed period is over, the rate will start changing based on the current interest rates.
FRM or Fixed-Rate Mortgage
This is the conventional mortgage where the rate stays fixed until you pay back your loan or get it refinanced. Although it could be higher than the initial rate of an adjustable-rate mortgage, an FRM offers you adequate protection against the rising interest rates.
If you need a loan that is higher than the limits that are set by the FHFA (Federal Housing Finance Agency) this is the loan you should go for. Jumbo loans are mostly applied for while buying luxury properties. The value of a Jumbo loan cannot exceed 150% of the loan limit. For instance, if the loan limit is $484,350, you can get a jumbo loan up to $726,525 (150 percent of $484,350). However, these loans necessitate a higher credit score and a larger down payment.
FHA (Federal Housing Administration) Loan
If you want to purchase a home but lack the funds to make a large down payment, an FHA loan would be ideal for you. Insured by the Federal Housing Administration, these loans comes with a down payment as less as 3.5 percent of the value of the property. You can get an FHA loan even if you don't have an excellent credit score. However, you may have to pay mortgage insurance, both upfront and annual.
APR or Annual Percentage Rate
This rate determines the amount that you need to pay on top of the loan amount. Apart from your interest rate, the APR also includes the fees and finance charges that you need to pay at the time of closing. Since it includes all costs of the loan, it is usually higher than the interest rate itself. Since the costs of loan vary from one lender to the other, it is better to compare loans keeping in mind, the APR.
One way to reduce your mortgage interest rate is by using mortgage points or discount points. You do this by paying up some fees at the closing. 1 percent of the loan amount would be considered as one mortgage point. By purchasing more discount points you can lower your interest rate significantly.
Mortgage servicer is the agency that collects your loan payments, sends you mortgage statements, and distributes payments for property taxes and insurance. Mortgage servicer might be different from the lender who gets in touch with you.
PITI (Principal, Interest, Taxes and Insurance)
PITI refers to the total amount that you pay towards your monthly mortgage payment. This includes your loan principal, the interest that you pay on the loan, the property taxes, as well as the amount that you pay towards insurance.
Underwriting refers to the process of approving your home loan. Once you submit your loan application, the underwriting department will ensure it contains all the necessary documents and then assesses your application based on how risky it is to lend money to you. Factors such as your credit score, your assets, and your employment are considered before making the final decision.
Origination fee refers to the fee charged by the lender to process your loan application. It usually ranges between 0.5 to 1 percent of the total loan amount.
While you are still negotiating terms with the best of the mortgage lenders who contact you, you can lock in your interest rate and make sure the market fluctuations won't affect you until you close. You will usually have about four to six weeks from the time of locking your interest rate to the date of closing. During this period even if the interest rate goes up, you will still get your loan at the rate that you have locked.
These are some of the basic terms that will help you get a clear picture of the mortgage market. Nevertheless, it is crucial that you go through the terms of the mortgage before you sign up with any of the lenders who come to you.
Author writes for Halbart Technologies. A reverse mortgage live transfer leads generation company in New York, US.