Whether a first-time homebuyer or looking to add another house to your plans, the mortgage process can be complicated. Below are some of the most common terms you may come across during your mortgage transaction and what they mean.
Adjustable Rate Mortgage (ARM): A mortgage product with an interest rate that adjusts up or down based on a pre-selected index. These are also known as re-negotiable or variable rate mortgages.
Amortization: The calculated repayment of loan principal and interest over a fixed period of time.
Debt-to-Income Ratio (DTI): A borrower’s monthly payment obligation divided by their gross monthly income. This ratio is reflected as a percentage.
Escrow: Funds collected by the lender as part of the monthly mortgage payment. It is used to pay real estate taxes and insurance obligations.
Loan-to-Value Ratio (LTV): The amount being borrowed divided by the appraised (market) value or selling price of the house. This ratio is reflected as a percentage.
Lock: A commitment obtained from a lender assuring a particular interest rate or feature for a definite time period. This protects the borrower from interest rate increases between the time of loan application and loan closing.
Mortgage Insurance: An insurance policy set up to allow a lender to recover some of their money if a borrower defaults on the loan.
Underwriting: The decision to approve a loan based on the homebuyer’s credit, assets, as well as other factors. This analyzes the borrower’s risk, and matches it to an appropriate rate, term, and loan amount.
Working with a mortgage professional will ensure that these, and any other confusing terms, will be made clear to you throughout the mortgage process.