Top Mortgage Terms You Should Know
Need to brush up on your mortgage lingo? Check out our comprehensive list of key industry mortgage terms:
The annual percentage rate (APR) reflects the cost of all credit and finance charges over a year term, including the interest rate, points, broker fees and other credit charges obligated to the buyer. The APR tends to be higher than a loan’s interest rate.
An appraisal is a written estimate of how much a property is worth. The appraisal is prepared by a licensed expert selected by an Appraisal Management Company to ensure appraisal independence requirements are followed.. Some appraisals also show how a property compares to others in the neighborhood.
A Closing Disclosure (CD) is a lender-supplied document sent at least three days before a home buyer’s scheduled closing. As it provides final details about the selected mortgage including projected monthly payments and fees, it should be reviewed carefully.
These consist of application fees, title examination, title insurance, recording fees and property fees. Home buyers can negotiate with the seller over who pays these fees. Sometimes, the seller will agree to pay some or all of them.
CLEAR TO CLOSE
When a mortgage loan is clear to close (CTC) the underwriter has approved all documentation necessary for the title company to schedule the closing and start drafting the Closing Disclosure (CD).
The amount the homebuyer pays in order to make up the difference between the purchase price and the mortgage amount. The majority of down payments range from three to 20 percent.
The debt-to-income ratio is a personal finance measure that compares an individual’s debt payments to his or her overall income and is used to determine loan eligibility. Debt-to-income ratios are calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.
Equity is the difference between the appraised value of a home and the total amount of any remaining mortgage. Home owners may choose to refinance to access the equity they’ve built in their home. Equity can often be built through paying down the mortgage, rising home values, or investments made in the home like kitchen or basement remodels.
ESCROW (A.K.A. IMPOUND)
A mortgage lender will set up an escrow account at the same time as a mortgage account in order to pay your property taxes and insurance with the money that is automatically deposited. The benefit to home buyers is that they don’t have worry about paying these bills separate from their mortgage.
A loan estimate (LE) details the terms of a loan along with estimated closing costs.
Loan-to-value ratio is a term used to describe the ratio of a mortgage loan to the value of the asset purchased. For purchase transactions, it’s calculated by dividing the loan amount by the purchase price of the property. For mortgage refinance transactions, the LTV is based on the appraised value of the property.
Private mortgage insurance (PMI) is usually required if a borrower puts down less than 20% of the home’s value. Once a home buyer has reached 20% in equity, they no longer have to pay PMI.
A mortgage point is one percentage point of the total mortgage amount. For example, one point on a $100,000 mortgage loan would be $1,000. Some home buyers opt to buy points at closing to obtain a lower interest rate and save over time.
A mortgage pre-approval is a preliminary commitment a lender makes to lend a set amount of money to a borrower under specific terms and conditions. This is often a first step in buying a home as many home sellers will only accept bids from potential buyers who have obtained this stamp of approval.
A rate lock is a promise made by a mortgage lender that the loan interest rate you’ve been offered can’t be raised for a set amount of days. After that period —usually between 15 and 60 days — the interest rate becomes subject to market changes.
RIGHT OF RESCISSION
This right is given to home owners who are refinancing their mortgages. Basically, it gives them time to make sure they’re happy with their new loan. If they change their mind for any reason within three business days of closing, they may cancel the transaction.
A title is official written proof that you own a property. Property titles typically come in the form of a deed and include a physical description of the property.