Are you thinking about buying a home?
What an exciting time in your life. Did you know that beyond choosing the right house, though, you must also choose the right mortgage? It takes more than calling your bank and asking for a loan. There are decisions to make regarding your finances as your mortgage affects your bottom line for the next 15 – 30 years.
Below is the most common mortgage ‘lingo’ you should know before looking for a mortgage.
1. APR – This isn’t your interest rate. It’s the total cost of borrowing money based on the interest rate plus the loan costs. It’s a good way to choose the right loan based on the overall cost.
2. ARM – Adjustable rate mortgages have interest rates that adjust, typically annually. You get an introductory rate for a few years, such as a 3/1 ARM, which has a fixed rate for three years and then adjusts annually. The rate is based on the chosen market index and the assigned margin.
3. DTI – Your debt-to-income ratio is the comparison of your gross monthly income (income before taxes) to your monthly obligations, including the new mortgage. Most loan programs allow up to a 43% total DTI. If your expenses take up more than 43% of your gross monthly income, it may be tougher to get a loan.
4. HELOC – Once you own your home, you may earn equity in it. If you have enough equity, you may borrow against it, especially in times of need, or if you want to make home improvements or pay for college. The HELOC is a home equity line of credit or second mortgage that allows this.
5. LOX – This is a letter of explanation. Not all borrowers need this, but if there’s something in your application or documents that isn’t clear or that an underwriter needs more clarification on, they may ask for the LOX. It’s just a written explanation of the situation or scenario. Sometimes it requires additional documentation for proof too.
6. LTV – You’ll hear this term often. It’s your loan-to-value ratio or how much you borrow compared to the home’s value. Each loan program has a maximum LTV, so it’s important to get familiar with the term.
7. PITI – This stands for principal, interest, taxes, and insurance. In short, it’s your entire mortgage payment. The mortgage payment your bank charges includes only the principal and interest, but your real estate taxes, homeowner’s insurance, and mortgage insurance are all a part of your mortgage payment. Lenders consider the PITI when determining your DTI.
8. PMI – If you borrow more than 80% of a home’s value and use conventional financing, you’ll pay Private Mortgage Insurance or PMI. If you take out government-backed financing, you may also pay mortgage insurance, but they call it MI or mortgage insurance.
Get to know these mortgage terms before you shop for a mortgage. If you’re unsure about what they mean, we’d be happy to help. We know the mortgage process can be overwhelming, but we are here to make it as easy as possible for you.
