8 Mortgage Terms to Know
If you’re buying a home, chances are you’re familiar with a mortgage loan. As the most common financing option in real estate, getting a mortgage should be a straightforward concept for home buyers to grasp. However, getting your loan might not be so easy if you’re unfamiliar with mortgage terminology.
If you need a real estate vocabulary lesson before getting a home loan, Mark Spain Real Estate has you covered! Our experts offer exclusive industry insight to help you comprehend critical real estate terminology. Read below for our glossary of mortgage terms to know before buying a home.
8 Mortgage Terms to Know
Annual Percentage Rate (APR)
Annual percentage rate, or APR, is your annual interest rate expressed as a percentage. Your APR is made up of your interest rate, your yearly costs for a home loan, mortgage insurance, closing costs, and lender fees. As you compare mortgage offers, it’s wise to look at your overall APR to get a better idea of your home-buying expenses in total.
Closing and Closing Costs
A real estate closing is the final step in purchasing a home. During the real estate closing, you, the seller, and your respective agents will meet to tie up any loose ends in the sale, including making final payments, signing legal documents, and officially transferring home ownership titles. Once everything is signed and squared away, you’re officially a homeowner!
Closing costs are the fees associated with the closing process that cover the title search process, document preparation, attorney fees, appraisals, and any other services needed to secure your mortgage. The average closing costs range from 2-5% of the home’s purchase price and don’t include homeowners insurance, mortgage insurance, or property taxes.
Debt-to-Income Ratio (DTI)
Debt-to-income ratio, or DTI, measures the portion of your monthly income going toward debt payments. When giving a home loan, mortgage lenders will use your debt-to-income ratio to decide whether you can pay a mortgage. Monthly debt payments may include credit cards, car loans, student loans, etc.
To calculate DTI, you divide your monthly debt payments by your gross monthly income. Your outcome will be expressed as a percentage. Generally, lenders will set a percentage limit when giving a home loan. While these limits will range by lender and loan type, conventional mortgage lenders typically have a cut-off of 36%.
Fixed-Rate Mortgage
A fixed-rate mortgage is a type of home loan you pay off within a fixed number of years. However, because of the set timeline, fixed-rate mortgage loans maintain the same interest rate throughout the life of the loan. While the amount toward principal and interest will fluctuate within each mortgage payment, the total will stay the same. Many homeowners opt for a fixed-rate mortgage loan because its predictability makes budgeting easier.
Loan-to-Value Ratio (LTV)
Loan-to-Value Ratio, or LTV, measures the size of your loan against the home’s sale price. Mortgage lenders will use LTV to determine the risk of giving you a loan. Generally, the higher the LTV, the higher the risk. For example, if you’re taking out a $60,000 loan for a $120,000 home, your LTV ratio is 50%. The remaining $60,000 for the home would come from the buyer’s down payment.
Private Mortgage Insurance (PMI)
Private mortgage insurance protects your lender if you cannot repay your loan. Buyers with down payments of less than 20% must pay for private mortgage insurance since lenders consider them high-risk.
Principal and Interest (P&I)
Principal and interest, or P&I, are some of the most essential mortgage terms. Principal is the amount of money you borrow from the lender. You will pay back your principal throughout your monthly mortgage payments. Interest refers to the amount you owe for borrowing the money. Together, principal and interest will make up the majority of your monthly mortgage payment, while the remainder will include taxes, home insurance, and private mortgage insurance, if applicable.
Underwriting
Underwriting is a step in the closing process where your lender verifies your income, assets, debt, and property details to give final approval on your loan. As a buyer, you will only participate in the underwriting process if your lender requests additional documents or asks follow-up questions on your financials. There is no set amount of time for the underwriting process, as it may take a few days to a long few weeks. The best way to ensure your underwriting process goes quickly is to get your request documentation promptly.
Sell or Buy a Home with Mark Spain Real Estate
Are you buying a home with a mortgage loan? Are you selling your existing home while trying to buy? The industry professionals at Mark Spain Real Estate are here to share our expertise. With decades of industry experience, we guarantee a smooth and stress-free home buying or selling journey! Check out our Guaranteed Offer Program for the potential to receive a competitive cash offer on your home in only 21 days. Contact our agents today!
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