Are you thinking of purchasing or refinancing a home, but are intimidated by complicated mortgage terminology? Here’s a quick guide to some commonly used terms to help you get started:
Common Mortgage Terms:
Annual Percentage Rate (APR): The rate of interest (on a yearly basis), which includes charges on the mortgage loan and the interest payment.
Adjustable Rate Mortgage (ARM): A home loan program where the interest rate and the monthly payment are adjusted at regular intervals according to the changes in a specified index.
Credit Score: A numerical quantity reflecting a borrower's creditworthiness. Used by lenders to find out the risk in approving a home loan.
Closing: The final step in the loan process when the seller transfers title to the buyer, the buyer signs the loan documents and receives the loan amount from the lender.
Closing Costs: Fees paid by the borrower at closing. These include charges for originating and processing the loan.
Down Payment: The amount of cash that the homebuyer pays towards the purchase price at closing.
Debt-to-income ratio (DTI): The ratio of your monthly debt to your pre-tax gross monthly income.
Escrow Account: An account into which the lender deposits part of the monthly payments made by borrower. The deposits include payments towards property taxes, homeowners insurance and mortgage insurance.
Fixed Rate Mortgage: A home loan program on which the interest rate does not vary throughout the life of the loan.
Private Mortgage Insurance: Insurance policy offered by an insurance company in order to protect the lender from losses if the borrower defaults on his payments.
Rate Lock: A written commitment that guarantees a set rate on your loan for a certain time period before closing. Usually, rates are locked for 30, 45 or 90 days until the closing date.