When you’re applying for a mortgage, all the unfamiliar terminology can make it seem like everyone around you is speaking in a foreign language. This can be not only confusing but also stressful, since the process you’re trying to navigate is an important one.
Here, we offer a guide, so you’ll understand the basic terminology involved in home financing.
- Adjustable rate mortgages (ARM): This type of mortgage has an interest rate that varies over time.
- Amortization: With each loan payment, you pay a little bit of your principal, slowly chipping away at your mortgage over the period of the loan. Your amortization schedule shows the reduction in the amount you owe on your mortgage as your payments are made.
- Annual percentage rate (APR): This is the interest rate paid on your loan annually, including mortgage insurance, discount points, and other costs.
- Debt-to-income ratio (DTI): This is the amount of money you owe on bills each month, divided by the money you have coming in. Lower is better when you’re trying to get a mortgage, and most lenders want your DTI to be under 43%.
- Down payment: The first payment made on a mortgage; this is the portion of your loan amount that you pay upfront. It’s a percentage of the total, and if your down payment is less than 20%, you’ll typically have to carry mortgage insurance.
- Earnest money deposit: Paid when the purchase agreement is signed, this is a good faith deposit that’s usually equal to about 1% to 3% of the home’s value. It lets the seller know the buyer is serious.
- Escrow: Part of each monthly payment is placed in an escrow account held by the lender. The money stays in the account until taxes or insurance premiums are due, allowing the buyer to spread these payments over 12 months instead of paying them annually.
- FICO: A term often used interchangeably with credit score, it’s the three digit number representing your creditworthiness. A score of 740 or above will get you the best terms on your mortgage.
- Fixed rate mortgage: The most popular type of home loan, this mortgage has an interest rate that remains the same throughout the term of the loan.
- Homeowners insurance: Also known as hazard insurance, this protects you and the lender from losing money if your home is damaged during a fire, burglary, storm, or other covered incident.
- Home inspection: Typically required by the mortgage company, this is an inspection to determine any problems with the house. It’s different than an appraisal, which just gives an approximation of the home’s value.
- Mortgage insurance: Also called private mortgage insurance (PMI), this insurance protects the lender if the borrower defaults on the loan. It’s typically required when you make a down payment of less than 20%.
- Preapproval: This is a document from a lender stating that the borrower has been conditionally approved for a home loan in a certain amount. It’s a much more stringent process than prequalification, which doesn’t require asset and income verification.
- Refinance: This is a loan that modifies an existing mortgage for the sake of a more convenient payment schedule, lower interest rate, or different loan terms. Essentially, it uses the property as collateral to pay off the original mortgage.
- Title insurance: Often included in closing costs, this insurance protects against disputes over ownership of the property. Unlike other types of insurance, this is paid once and stays in place for the entire time you own the house.
Once you’ve got the lingo down, it’s time to get the loan! At First Coast Mortgage Funding, we offer creative solutions to help borrowers improve credit and overcome roadblocks when trying to secure home financing. Committed to helping people in the First Coast region buy and refinance residential properties, we specialize in every kind of property, working to provide home loans to our clients at the lowest interest rates, with the best possible service. Contact us through our website or call 904.217.5450 for more information.