Guide to understanding mortgage terms
Just about every industry has its own jargon that makes perfect sense to insiders but often confusing for everyone else. The home loan business is no different. Points. APR. Closing costs. FHA.
Get a handle on those terms by contacting one of loanDepot’s licensed loan officers at (888) 983-3240. They can help you with all of your lending needs. In the meantime, here are key terms to get you started.
Adjustable rate mortgage (ARM): This is a loan with an interest rate that can fluctuate. The initial rate for an ARM is typically less than for a fixed rate mortgage. That initial rate will not change for a specified period - as short as one year and as long as a decade. After this time frame, the interest rate will adjust periodically - typically once a year - in line with market rates.
Annual percentage rate (APR): The APR is the all-in cost to borrow money to buy or refinance a home. The APR includes the basic interest rate you pay, along with other costs to obtain a home loan. The APR for an adjustable rate mortgage is based only on the original rate and does not reflect the maximum interest rate you may pay over the life of the loan.
Appraisal: Before a mortgage is approved, the lender needs to confirm the value of the property. Most lenders, protecting their investment, won't give a mortgage for more than the market value of the home. Your lender will hire an appraiser to conduct this evaluation. You will pay for the appraisal; the typical fee is $300-$400 or more.
Closing: This is the formal process where you sign the final documents, making the home loan a done deal. A few days before your closing appointment, you will be sent a closing disclosure document that details all the terms of your deal, including the cash required to close the agreement.
Conforming mortgage. This is a loan that meets rules laid out by Fannie Mae and Freddie Mac. The maximum loan value is typically $424,100 for a single-family home, though it can be as much as $636,150 in certain high-cost areas. Loans above the conforming limit are called jumbo mortgages. Conforming loans typically charge a lower interest rate than jumbos. A conforming loan must also follow other rules set by the investors – in this case the GSEs – such as debt-to-income limits.
Debt-to-income ratio (DTI): To qualify for a home loan, lenders will insist the monthly cost of the mortgage and other major financial obligations (such as car payments and student loans) don’t eat up too much of your total pretax monthly income. As a general rule, your DTI has to be no more than 43 percent, though it can range as high as 50 percent depending on your specific financial situation, the type of loan and lender.
Down payment: This is the amount of cash you put toward the purchase price of a home. A down payment of 20 percent (with the mortgage covering the other 80 percent) puts you in line for the best loan terms. Some home loans require low down payments of just 3 percent.
Equity: This is the amount of a home’s market value that exceeds the mortgage balance. Example: If a home is worth $250,000 and the mortgage balance is $150,000, you have $100,000 in home equity. That means you have 40 percent equity: $100,000 is 40 percent of $250,000. (Learn more about home equity loans.)
Federal National Mortgage Association (FNMA, Fannie Mae): This is a government-sponsored enterprise (GSE) that provides the financing to lenders, helping them offer mortgages to individual borrowers. A conforming loan. follows Fannie Mae or Freddie Mac guidelines.
Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac): Another GSE, this one provides financing to lenders that lets them offer mortgages to individual borrowers. A conforming loan follows Freddie Mac or Fannie Mae guidelines.
Federal Housing Administration (FHA): A part of the U.S. Department of Housing and Urban Development, this outfit insures home loans for qualified borrowers. FHA-insured loans require down payments of as little as 3.5 percent and typically have more lenient debt-to-income rules than conforming mortgages.
Fixed rate mortgage (FRM): This is a loan where the interest rate will never change. The rate for a fixed-rate mortgage will typically be higher than the initial rate charged on an adjustable-rate mortgage. But with an ARM, you take on the risk that the rate will end up a lot higher than the fixed rate.
Jumbo mortgage: This is a loan for more than the conforming loan limit, which is typically $417,000 in most parts of the country. Jumbo mortgages often require higher down payments than conforming loans, and the interest rate may be higher.
Point: This is a fee you can pay at closing to reduce the interest rate of your loan. One point is equal to 1 percent of the mortgage amount. You can typically reduce (buy down in lender lingo) your interest rate by 0.25 percent or so for each point you pay. You can pay points upfront with cash or you can add the cost of the point(s) into your loan amount.
Principal: This is the base amount of the home loan. Your mortgage payment will also include the interest you owe on the loan balance, plus property taxes and/or homeowner insurance premiums that will remain in an impound or escrow account if you’ve elected this option.
Principal, interest, tax, insurance (PITIA): Many lenders will require you to open an impound account (also known as escrow) to cover your property tax and homeowner insurance premiums. PITI is an acronym for the monthly cost of the four expenses that lenders care about.
Private mortgage insurance (PMI): When you make a down payment of less than 20 percent for a conforming mortgage, you typically must pay for insurance that will cover the lender if you fall behind on your home loan payments. You can typically get rid of PMI once you have at least 20 percent equity in your home. FHA-insured loans also charge a type of mortgage insurance. The only way to get rid of that charge is to refinance.
If you have questions about these loan terms or are ready to get started with a purchase loan, please call a loanDepot licensed loan officer at (888) 983-3240.
Published on Jan. 9, 2017
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