ARMs? Balloons? Origination fees?
You may hear a lot of confusing terms and acronyms when looking for a home mortgage. Here are 20 of the most common ones you may come across.
ARM (adjustable-rate mortgage) – A mortgage where the interest rate is adjusted up or down periodically after an initial fixed period. This is also sometimes referred to as a renegotiable-rate mortgage or a variable-rate mortgage.
Amortization – Repayment of debt over time in equal installments. An amortization schedule shows how much of each monthly payment goes toward principal and how much goes toward interest. (The percentage of each payment going toward principal increases each month.)
APR (annual percentage rate) – The cost of credit on a yearly basis, expressed as a percentage. Because it includes certain costs paid to obtain the loan, the APR is usually higher than the interest rate.
Balloon – A lump-sum payment required at the end of the loan term to pay off the remaining balance. This balloon is usually much larger than the loan’s regular monthly payments.
Buydown – Additional discount points (fees) paid by a builder, seller, lender, or buyer to reduce (either temporarily or permanently) the interest rate to below market level. A temporary buydown lowers your interest rate during the first few months or years. A permanent buydown reduces the rate for your entire loan period.
Closing disclosure – Provides the actual costs and terms of your loan. You will receive it at least three business days before closing.
Debt-to-income (DTI) ratio – A percentage that lenders look at to decide if you qualify for a mortgage. DTI is calculated by adding together your current monthly debt and any potential mortgage payment, then dividing it by gross monthly income. Some lenders require your DTI (including your new potential mortgage payments) to be less than 36%. Others may be comfortable with a DTI as high as 43%.
Discount points – A one-time charge imposed by your lender to offer a lower interest rate. Each point is equal to 1% of the mortgage amount. So, on a $200,000 mortgage, each discount point would cost you $2,000, paid upfront.
Escrow – Money collected by your lender as part of your monthly mortgage payment. The lender holds it “in escrow” to pay your real estate taxes and insurance obligations.
Flood certification – A process that determines whether property is at special risk for flooding. This is determined by the Federal Emergency Management Agency (FEMA).
Hazard insurance – A policy that insures the homeowner against loss from multiple perils, from fire to storm damage. There are wide variations in policy coverage, which generally insures both the home and its contents.
Loan estimate – A summary of the terms of your loan and estimated costs. This estimate is issued by the lender within three business days of receiving your loan application. Once you review this estimate and submit the Intent to Proceed form that came with the estimate, your loan will begin processing.
Loan-to-value (LTV) ratio – A percentage that lenders look at to decide if the home you’re interested in qualifies for a mortgage. The LTV is calculated by dividing the amount being borrowed by the appraised value or selling price of the house.
Lock – A commitment from a lender to offer you a particular interest rate or feature for a definite time period. This protects you from interest rate increases between the time you apply for a loan and loan closing.
Origination fees – A fee your lender charges you to cover processing, administration and loan documentation preparation. The amount of the fee is usually a percentage of the loan amount.
PITI (principal, interest, taxes and insurance) – Your total monthly housing expense. This includes principal and interest on your loan, your property taxes, any hazard insurance, and any private mortgage insurance and/or flood insurance.
PMI (private mortgage insurance) – An insurance policy that allows your mortgage lender to recover part of its financial losses if you default on your loan. This is usually only required if your equity in the home is less than 20%.
RESPA (Real Estate Settlement Procedures Act) – A federal law governing real estate lending fee practices and disclosures.
TILA (Truth in Lending Act) – A federal law that requires the disclosure of the APR and other information to homebuyers shortly after they apply for a loan. The disclosure form is sometimes referred to as the TIL.
Underwriting – The process of assessing whether to offer a loan to a potential homebuyer based on their credit, employment, assets and other factors—and if so, deciding on the appropriate loan amount, rate, and terms, based on risk.