When looking into buying a home, you can be bombarded with an alphabet soup of acronyms and technical terms. To help you easily navigate the process, here are the ABCs you need to know before jumping into buying a home:
Adjustable Rate Mortgage (ARM) – A mortgage with an interest rate and payments that adjust at scheduled dates based on a pre-selected index.
Annual Percentage Rate (APR) – The cost to borrow money expressed as a yearly percentage. It includes the interest rate plus other charges or fees.
Appraisal – A report that states an estimate or an opinion of the property value as determined by a qualified, independent third-party known as an appraiser. The term also refers to the process for obtaining the estimated value of the property.
Closing Costs – Money paid by or for the borrower at the closing of a home loan. Examples include an origination charge, discount points, and fees for required third-party services, taxes, and government recording fees.
Closing Disclosure – A document provided to customers at least three business days before closing that shows the actual terms and costs of the loan. These costs may include hazard and/or mortgage insurance premiums and escrow deposits for property taxes.
Conventional Mortgage – A home loan that is not guaranteed or insured by the federal government.
Credit Score – A three-digit number that indicates your creditworthiness based on information provided by your creditors and lenders.
Debt-to-Income Ratio (DTI) – Reflects your monthly debt and debt-related costs as a percentage of your monthly gross income.
Escrow Account – An easy way to manage property taxes and insurance premiums. You do not have to save for them separately because you make one monthly payment where part goes toward your mortgage’s principal and interest, and the other part goes into your escrow account for property taxes and insurance premiums (like homeowners insurance, mortgage insurance, or flood insurance). When these come due, they are paid on your behalf from this account.
Federal Housing Administration (FHA) – The federal agency under the Department of Housing and Urban Development (HUD) that insures certain residential mortgages.
Fixed Interest Rate – An interest rate that does not change throughout the life of the loan.
Homeowners Insurance – An insurance policy that protects the property against losses, combining liability coverage and hazard insurance.
Loan Estimate (LE) – A document delivered or mailed to customers by the lender within three business days of mortgage application. The Loan Estimate provides an estimate of closing costs and fees as well as the loan terms.
Loan-to-Value Ratio (LTV) – The current loan amount compared to the value of the property, expressed as a percentage. For example, a loan amount of $150,000 for a home valued at $200,000 would have an LTV ratio of 75%.
Mortgage Insurance Premium (MIP) – Mortgage insurance protects the lender or others if the borrower does not make the required payments. If a home loan has mortgage insurance, it may be collected as part of the monthly payment.
Purchase Contract – An agreement between a buyer and seller of real property that states the price and terms of the sale. This is also known as a “sales contract.”
Private Mortgage Insurance (PMI) – Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.
Rate Lock – An agreement between the borrower and lender that holds the interest rate, points, and term of the loan for a specific time period.
Underwriting – Analysis of risk and setting of appropriate rate and terms for a mortgage on a specific property for specific borrowers.
Variable Interest Rate: An interest rate that changes with fluctuations in such indexes as the U.S. Treasury bill index.
Feel like you’ve mastered the lingo? Find a friendly Loan Officer in your area to start the homebuying process.
At Peoples Mortgage, it’s all about the people.