Purchasing a home is an overwhelming experience. So many emotions, decisions to make, financial data to gather, papers to sign, and new vocabulary to decipher. Do you ever feel like the home buying process requires fluency in another language or maybe a secret decoder ring?
ARM (Adjustable Rate Mortgage): A loan in which the interest rate changes periodically based on a standard financial indicator. This is in contrast to a fixed-rate mortgage in which the loan amount remains the same throughout the life of the loan.
APR (Annual Percentage Rate): A broad measure of the costs you will pay to borrow money. The APR reflects the interest rate, points, fees and any other charges required to obtain the loan. The APR is typically higher than your interest rate due to the extra fees.
DTI (Debt-to-Income): This ratio of housing expenses and monthly debt obligation compared to how much you earn is used to measure whether you can afford the mortgage. When it comes to this “score”, remember – the lower the better.
GFE (Good Faith Estimate): A written estimate of expected closing costs provided by the lender within three days after submission of the loan application.
HUD-1 (Housing and Urban Development settlement statement): The HUD-1 form (pronounced “hud one”) is also known as the settlement or closing statement. Borrowers have the right to inspect the form one day prior to closing. It is a standardized, government-mandated form used to itemize fees charged to the borrower when purchasing or refinancing real estate.
LTV (Loan to Value): This ratio of a loan amount compared to the value of the home purchased is used by lenders to determine the mortgage rate for which you are qualified. To determine your LTV, your lender will divide your loan amount by the lesser of the home’s appraised value or purchase price. In general, borrowers with lower LTV ratios will qualify for lower mortgage rates.
PITI (Principal Interest Taxes Insurance): Pronounced like the word “pity”, this sums up the components that make up a monthly mortgage payment. The principal is the actual amount of your loan that you are paying off every month. Interest is the amount the lender charges for the loan. Initially, the largest part of your mortgage payment goes toward paying down the interest. Taxes are the real estate taxes that may be paid as part of your monthly payment and passed on to the local municipality to pay for schools, roads, police, and other services. Insurance refers to your homeowner’s insurance premium that may be collected by your lender and paid to your insurance company.
PMI (Private Mortgage Insurance): An insurance policy on conventional loans that protects the lender against homeowner default. PMI is typically required if the down payment amount is less than 20 percent of the home’s sale price. The buyer pays for the coverage in monthly installments. PMI can usually be canceled when the buyer has built up 20 percent equity in the home, as long as monthly payments are up to date.
Now that you’ve explored some basics, you may have questions about how all of this applies to your particular situation. Contact a loan advisor near you for additional guidance and move another step closer to achieving your real estate goals!