Ever read a contract where most of the terminologies make you want to scratch your head? The mortgage lingo is no different from the rest of the law or tech world where you’ll often find lots of acronyms and cryptic vocabulary. Learning these mortgage terms can you help you better understand your mortgage forms. You will be looking confident and sure when you banter about points and closings with your mortgage advisor or your real estate agent.
Below are the 10 commonly used mortgage lingo that you’ll definitely hear and read as you prepare to make one of the biggest purchases of your life.
Escrow – is a neutral third party that brings all the parties together in a transaction. It holds all the money, titles, personal property or anything of value until all transactions are successfully completed. This process ensures that that all the instructions are followed and all funds, bills, and documents are handled properly during the transaction. The escrow company is there to make the process easier for you and the seller.
APR – This is the annual percentage rate, a standardized method of calculating the cost of a mortgage which includes interest rate, mortgage insurance, points, and other charges that you have to pay to get the loan. For example, if you are choosing between two loans both with 3.3% interest rate, one with an APR of 3.41% and the other with an APR of 3.45%, the loan with the lowest APR is the best choice because it provides the lowest cost of a mortgage.
LTV Ratio – A Loan-To-Value is a comparison between the value of the property and the value of your loan. For example, if you are taking on a $120,000 mortgage to buy a home appraised at $135,000, your LTV ratio is 88.88% (120,000/135,000).
The Lender evaluates your LTV ratio during the underwriting. If you have lower LTV ratio you are considered less risky because you have more equity. Majority of lenders offer mortgage and the lowest possible interest rate when the LTV ratio is at or below 80%. Your LTV ratio also determines whether you have to pay PMI.
PMI – Private Mortgage Insurance is an insurance that protects the lender against loss in the event you default on your loan. Most lenders require a PMI for loans with LTV ratio of over 80% or a down payment of less than 20%. PMI allows you to make a smaller down payment on a home, but can cost you an extra 0.3% to 1.5% of the original loan amount per year. For example, for a $120,000 loan, assuming the PMI fee is 1%. You’ll be paying $1,200 per year or $100 per month on top of your mortgage.
Appraisal – Home appraisal is a requirement by your lender. It is your responsibility to get the home appraised. You usually pay for it as part of the mortgage costs at the time of closing. A licensed appraiser comes to the property and inspects it to determine the fair market value of the home. The value of the home will determine how much the lender is willing to lend you to buy the property. Also, home appraisal will determine if the asking price is lower or higher than the actual value of the property.
Origination Fee – An origination fee is an up-front fee charged by a lender to process a loan application. Origination fees are quoted as a percentage of the total loan and are generally between 0.5 and 1% on mortgage loans. It makes $1,200 on a $120,000 loan. Like mortgage, origination fee can be negotiated especially on large loan amounts. The most common way to lower the origination fee is to pay a higher interest rate for the mortgage, of course this is only a good deal if you plan to sell within a few years.
Points – points come in two varieties: origination points and discount points. Each point is a charge equal to 1% of the loan amount. For example, on a $135,000 home, one point is equal to $1,350. Origination points are used to compensate loan officers. Discount points are prepaid interest, the more points you pay, the lower your interest rate will be. Most lenders give you an opportunity to purchase up to 3 discount points. If you are planning to live in your home for a long time, it’s a good idea to buy points to lower your interest rate; it will save you money in the long run.
Good Faith Estimate – or GFE is a written estimate of expected closing costs that a lender must provide to you within three days of submitting a mortgage loan application. Lenders are required by law to make as accurate an estimate as they can but true figure can sometimes be different.
Closing Costs – These are all of the costs incurred for the loan. This typically makes up 2-5% of the purchase price of the house. The closing costs are fees charged by lenders and other parties associated to the purchase of the home. These include home inspection (unless a different arrangement has been made between parties), title services, home owner’s insurance, government recording fees and taxes, buyer’s attorney, appraisal fee, survey fee, origination fee etc. The seller of the property may contribute to the closing costs in some instances.
Underwriter – When you apply for a mortgage loan, the underwriter ensures that you meet all of the loan requirements, make sure that all of the tax, title, insurance, and closing documentation is in place, review the appraisal to check its accuracy, and subsequently, approve or deny a loan. No lender funds a loan without the approval of an underwriter.
