Top 10 Mortgage Terms You Need to Know Before Buying a Home
If you are ready to embark on your homebuying journey, you are likely full of excitement but also worried about the complexity of the process or understanding those funky mortgage terms. No worries – ALCOVA is here to simplify this process for you! Here is our top ten list of mortgage terms you need to know when buying a home.
Appraisal – An appraisal is an unbiased professional opinion of the value of a house. Lenders often require one to be certain that the home is worth its purchase price and can be sold to cover losses in case the buyer defaults on the mortgage.
Annual percentage rate (APR) – This rate identifies the annual cost of a loan and expresses it as a percentage. An APR includes the interest rate as well as other home loan costs, including mortgage insurance, closing costs, and any additional fees.
Closing and Closing Costs – Closing is the time and place when all Closing Documents for your loan are signed, dated, and notarized. Closing Costs are fees related to title search and insurance, document preparation, attorney fees, appraisals, etc.
Debt-to-Income Ratio (DTI) – Expressed as a percentage, this ratio indicates to a lender how much of your total income is obligated to the debts on your credit report. In other words, it helps a lender determine if you can afford the loan.
Escrow – Escrow is used to temporarily hold a buyer’s earnest money (or good faith deposit), which demonstrates a level of seriousness in following through with the eventual purchase of the home. After the purchase is complete, escrow may also be used to hold a portion of the homeowner’s monthly mortgage payment, which is put toward the payment of taxes and insurance.
Fixed-Rate Mortgage – A fixed-rate mortgage loan is a loan that you pay back over a certain number of years, typically 15 or 30 and has the same interest rate throughout the life of the loan.
Loan-to-Value Ratio (LTV) – This is the ratio between your loan amount and the total home price you are purchasing.
Mortgage Insurance (PMI) – If a buyer has a down payment that is less than 20%, they are required to pay for Private Mortgage Insurance also known as PMI. Mortgage insurance is required to protect the lender in case the buyer can no longer afford to pay back the loan.
Principal & Interest (P&I) – Principal and Interest, abbreviated to P&I, are two of the most common terms when it comes to mortgages. Principal refers to the amount of money borrowed. Interest refers to the amount that is owed for borrowing the money. Principal and interest make up most of your mortgage payment, usually followed by taxes, home insurance, and PMI if applicable.
Underwriting – Underwriting simply means that your lender verifies your income, assets, debt and property details in order to issue final approval for your loan.
After mastering these ten terms, you are well on your way to getting started on buying a home. You will also super impress your realtor and loan officer! If you are rearing to go, we are, too! Contact one of our mortgage professionals today to start your homebuying journey.
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