Plain English guide to terms you’ll hear from your loan officer
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There are dozens of acronyms and abbreviations your loan officer may use that are unfamiliar to you. Below we’ve defined the most common ones for reference, but remember:
- Don’t be intimidated, and don’t be afraid to ask the meaning of any term you don’t know.
- Asking for clarification will help you feel confident that you are making the right decisions about your home loan.
- Familiarizing yourself with these basics will help you communicate better with any loan professional.
Loan officer alphabet soup: terms you’ll hear
APR? LTV? DTI? CLTV? FICO? ATR? PMI? MIP? Your mortgage loan officer might sound as though he or she swallowed a bunch of Scrabble tiles, but these are real terms. Terms you’ll want to know when you apply for a home loan.Verify your new rate (Jan 18th, 2019)
Definitions of common mortgage terms
First, if your loan officer is throwing around all sorts of jargon without any explanation, you’re not the one with the problem — he or she is. Don’t be intimidated, don’t be afraid to ask the meaning of any term you don’t know. However, knowing these basics will help you communicate better with any loan professional you use.
Adjustable Rate Mortgage (ARM)
Adjustable rate mortgages feature lower interest rates than fixed-rate home loans. However, after an introductory period of one-to-ten years, the interest rate for these loans resets, or adjusts. That makes them riskier to borrowers than fixed-rate loans. Those who plan to own their homes for more than a few years may be better off with a fixed-rate mortgage, or FRM.
Annual Percentage Rate (APR)
The APR refers to the total cost of borrowing, expressed as an interest rate. That means not just the interest you’d pay. It includes the lender fees as well. The APR’s purpose is to make shopping for a mortgage easier. For instance, what’s a better deal — a 4.5 percent 30-year loan costing no points or fees, or a 4.0 percent loan costing two points? APR can tell you. In this case, the APR for the first loan is 4.5 percent, and for the second mortgage, it’s 4.165 percent.
Amortization is the repayment of a loan — the allocation of interest and principal as you pay your loan each month. After the interest due is deducted, the remaining amount of your payment goes toward reducing the principal balance. Each month, the balance is slightly lower, so less interest is due. Over time, more and more of your payment goes toward principal, and less is needed to cover interest, until your balance in zeroed and your loan is repaid.
An appraisal is a report prepared by a licensed appraiser. Mortgage lenders require it to determine the value of the property they are lending against.
Ability To Repay (ATR)
The ATR provision of the Dodd-Frank Act requires mortgage lenders to verify that borrowers can afford the payments when they are approved for a mortgage. That means income must be verified.
These are the charges that buyers pay when they purchase property. They may include property transfer taxes, mortgage lender fees, fees to third party providers and to government
Closing Disclosures (CD)
This is your final set of documents when you close a mortgage. They replace the old HUD-1 form. These disclose the terms of your loan and its costs. It should match the most recent Loan Estimate that you received when you locked your interest rate.
Debt-To-Income Ratio (DTI)
This is the relationship between your income and monthly debt payments. It’s your debts like mortgage payments, auto loan payments, student loans, credit cards, etc., divided by your gross (before tax) income. Mortgage lenders prefer DTIs under 41 percent.
This is the amount you pay toward your property purchase. For a 90 percent loan, you’d put ten percent of the purchase price down. Some loans require as little as 3.5 percent, three percent or even zero percent down.
The difference between the property value and the total of all mortgage balances against it is called home equity. Over time, you add equity by paying down your mortgage. As the property value increases, you also add to your hoe equity.
Escrow can mean two things. First, it’s a process through which payments to and from all parties in a real estate are collected and distributed. Down payments, earnest money, closing costs, real estate commissions, etc., all pass through the escrow account. The second definition of escrow is money that your mortgage lender collects with your monthly payment for property taxes and homeowners insurance. The lender then pays these on your behalf as they become due.
This is the most commonly-used credit scoring method. You can get a FICO score from any of the three major credit bureaus: TransUnion, Experian and Equifax.
Fixed Rate Mortgage
This is the most common type of home loan. The interest rate is fixed for the life of the loan, so the principal and interest payment does not change. Fixed-rate mortgages, or FRMs, are considered the safest loan when interest rates are rising. However, those who don’t plan to keep their homes more than a few years can benefit from the lower rates offered by ARMs.
This preliminary disclosure replaced the old Good Faith Estimate (GFE). It discloses the terms of a home loan, including its interest rate and the costs involved. You should get one within three days of applying for a mortgage, and updated estimates when there are material changes in your application.
Loan-to-value, or LTV, refers to the relationship between a property’s sales price or appraised value and the amount of loans against it. It’s the mortgage balance / the property value. So a $100,000 house with a $90,000 mortgage against it has an LTV of 90 percent. When there is more than one loan involved, perhaps a first and second mortgage, the calcculation is called the combined loan-to-value, or CLTV.
This fee covers the lender charges associated with originating, processing, underwriting and funding a home loan. It is often expressed as a percentage of the loan amount.
Also called “discount points,” these are additional, optional fees that borrowers can pay to reduce, or “buy down” their mortgage rates. Because to get the lowest possible rate, you have to pay higher costs. A mortgage calculator can help you determine if it’s worth paying points to get a lower rate and payment.
This is the amount you borrow. Over time, you pay this off with monthly payments.
Private Mortgage Insurance (PMI)
Mortgage lenders often require borrowers to pay for PMI when they put less than 20 percent down on a property purchase or have less than 20 percent equity for a refinance. This policy protects the leder if you default (fail to repay your mortgage as agreed). When you have at least 20 percent equity, you can often drop this coverage. When you take a government-backed loan like the FHA mortgage, this insurance is called MIP, or mortgage insurance premium.
Title insurance protects you and your lender from legal issues that may pop up that compromise your ownership of a property. For example, if you bought a foreclosure home, and it turns out the lender had no right to foreclose, you might lose your home. Most lenders require that you buy a lender’s policy to protect its interest. You can protect your own equity by also purchasing an owner’s policy.
So now you know some of the most oft-used terms in mortgage lending. You can go out and shop for your home loan with confidence.
What are today’s mortgage rates?
Current mortgage rates depend on your credit profile, down payment size and type of mortgage. But regardless of your profile, you can get a better deal by shopping with several competing lenders.Verify your new rate (Jan 18th, 2019)