10 Mortgage Terms You Will Hear During the Loan Process
Searching for your dream home should be fun, but it’s easy to get weighed down by an endless sea of unfamiliar abbreviations like “APR,” “PMI,” or “LTV.” For this reason, first-time homebuyers often find the process daunting or unachievable. The good news is that there are a few ways to make the process easier.
The first thing you can do is choose an experienced personal lender and a local real estate agent. Together, they can guide you through the process and help you find the right home for your needs and budget.
To better prepare yourself for the house hunt, you should also brush up on some common mortgage loan terms, such as:
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio refers to how much money you spend on monthly debt payments compared to your gross monthly income. To calculate this percentage, lenders will divide your monthly debt payments by your gross income. Your DTI must be below a certain threshold to qualify for a loan.
Loan-to-Value Ratio (LTV)
The LTV is the ratio of your loan amount to your total home price. For example, if you purchase a home for $300,000 and pay 20% ($60,000) as your down payment, your loan would be $240,000, and your LTV would be 80%.
Private Mortgage Insurance (PMI)
If your LTV is above 80% — which means your down payment was less than 20% of the home price — you will likely be required to pay for private mortgage insurance. This insurance is paid in monthly installments, which are added to your principal and interest. The insurance protects the lender if you default on your loan.
Talk to your personal lender about when and how you can stop paying or eliminate PMI, as it varies based on the loan options you selected.
Your personal lender represents the institution loaning you money to buy a home. While lenders can come from banks or credit unions, companies like Summit Mortgage exclusively lend money for mortgages.
Personal lenders specializing in mortgages often have the knowledge, experience, and customer service that can cater to the needs of all types of customers.
“Down payment” is an often-used mortgage loan term: It’s simply the amount you must pay upfront to close on a home purchase. Depending on the loan program you use, you may be able to close on your home with 0% down. However, traditional loans usually require a down payment of 5–20%.
Your loan term is the number of years it will take to pay off a loan. Many homebuyers select a standard mortgage loan with a 30-year term, meaning you will make 360 monthly principal and interest payments during the life of a loan. You can also opt for a 10-year or 15-year term. A shorter term will result in less interest paid over the life of the loan, but your monthly payments are likely to be significantly higher.
When buying a home, you may choose (and sometimes are required) to deposit a portion of your annual property taxes and homeowner’s insurance premium in an escrow account. This account is like a savings account that your lender uses to pay expenses like property taxes and homeowners insurance while also paying down your loan. It does not accumulate interest like a savings account but holds your monthly payment to fund the expenses that are your lender’s responsibility to pay on time. This amount is not part of your down payment; it’s a separate expense.
Closing costs include all of the fees related to originating and finalizing your loan, such as:
- Down payments
- Attorney fees
- Document prep
- Escrow deposit
- Title search
Your total “closing costs” represent the amount you will be expected to pay at the closing table.
Annual Percentage Rate (APR)
The annual percentage rate is the annual cost of your loan, which is calculated as a percentage. Your APR includes the loan interest rate, brokerage fee, closing costs, and mortgage insurance. That’s why your APR will also be slightly higher than your interest rate.
The interest rate is the cost of borrowing money to buy your home. The higher your rate, the more you will pay in interest over the life of the loan. Rates constantly fluctuate, but top lenders often offer a “rate lock” as you finalize your loan, guaranteeing a certain static rate even if overall rates go up.
How to Put Your New Knowledge to Use
These 10 are some of the most common terms you’ll hear when looking for a new home and applying for a mortgage loan. However, you are bound to come across other phrases and terminology. Your personal lender will review these with you to ensure you understand every part of the mortgage process.
If you have questions, you should feel comfortable asking right away. Buying a home can be an incredibly rewarding and enjoyable process, but it’s important to know exactly what you’re signing up for, which means familiarizing yourself with mortgage loan terms and choosing a reputable lender with your best interests in mind.