In an adjustable-rate mortgage, the interest rate on the mortgage amount varies over time. This means that your loan payments may vary month to month. An adjustable-rate mortgage typically runs lower than a fixed-rate mortgage rate but fluctuates and can become higher.
Amortization is the process of breaking down your loan into payments over time. When you take out a loan, your fixed monthly payments will be broken down into an amortization table, where different parts of the payment go towards interest, principal, and other fees like taxes. Although your payment may stay the same, the amount that goes to each part of the loan will shift over time.
Your annual income is the total amount of all money you’ve earned in a fiscal year. A fiscal year refers to any 12-month year (as opposed to a calendar year, which begins January 1st and ends on December 31st). The total amount of money earned before taxes is a gross annual income, while the amount after any deductions is considered a net annual income. Most lenders will ask for proof of annual income when calculating your eligibility for a mortgage.
Annual Percentage Rate (APR)
APR is the annual percentage rate of a mortgage loan. It takes into consideration not only the interest rate but any lender fees and discount points that come with the loan. This allows you to compare loan offers that come with different interest rates and fees.
A house appraisal is an objective evaluation of the market value of a property that determines how it should be priced to sell. Because each house serves as collateral for the mortgage, lenders request appraisals to determine the appropriate amount of money for a mortgage.
Appraisals are carried out by licensed professionals who are carefully regulated to ensure objectivity. Each report takes into consideration factors like the property’s condition and age, location, and past sales.
Every home sale through licensed agents and brokers comes with closing costs, which are due at closing, typically in the form of a cashier’s check. Both the buyer and seller typically have closing costs. Buyer closing costs include mortgage insurance, appraisal, property tax, closing, and attorney fees. Seller closing costs typically involve agent commission, transfer tax, HOA fees, and seller attorney fees.
Closing costs vary with every home purchase, so make sure to reach out to your lender, realtor, and attorney to confirm the total amount before your closing date.
A Closing Disclosure is a form that details the final terms of your mortgage. It’s issued by your lender three days before closing so that you have a chance to read and agree to it before officially buying your house. It’s important to check the Closing Disclosure carefully to confirm all terms, mortgage closing costs, and fees and to note any changes from any previous loan estimates you received from the lender. Once you sign the Closing Disclosure, all final documentation will be prepared for you to read and sign on your closing date.
A co-signer is an individual who promises to pay off a loan if you are unable to. Some lenders allow co-signers for individuals who don’t meet credit score or income requirements, effectively allowing the borrower to have a back-up plan if they can’t make payments.
Credit (History, Report, and Score)
Your credit score is crucial in determining your eligibility for mortgage loans. Lenders will pull a credit report on your history, which shows the types of loans and credit you have used in the past and how consistently you have made on-time payments to pay off your debt.
Debt-To-Income Ratio (DTI)
Mortgage lenders require borrowers to fall under a preset debt-to-income ratio to prove that the borrower has enough income to make mortgage payments on top of any other debt they owe. To calculate your DTI, divide your total amount of debt due in a set period by your income in that period (e.g., $200 of student loan payments / $800 monthly income = .25%). Typically, the maximum DTI considered for conventional loans is around 50%, and for FHA loans is 57%.
A property deed is a physical document given to you at closing that states that you hold the title to your home. It identifies both the seller and the buyer and is signed by both. There are several different types of deeds, but most house sales come with a General Warranty Deed, which states that you hold both the title and the right to sell the property.
A down payment is the amount of cash that you pay upfront for your home. Different types of loans require different percentages of the home price to be paid as a down payment. FHA loans require a 3.5% down payment, while conventional loans require anywhere from 3-20%, depending on your financial history and credit score.
Equity describes the amount of value that you have in your home based on how much of the loan you have paid off. When you first purchase your house with an FHA loan and put down 3.5% as a down payment (or with a conventional loan at 15%), that down payment counts as equity.
Note that as you make monthly payments, the portion that goes to paying off interest does not count as equity.
Escrow is an amount of money held before a balance is paid off to ensure that the borrower will make complete payments. When you put in an offer on a house, you will be asked to put down a “good faith” deposit, which will be held in escrow until the transaction is complete. This shows the seller and other parties that you are serious about a property.
A fixed-rate mortgage is a mortgage with a locked-in interest rate that will not change over time. This typically means that even as real estate market values fluctuate over the term of your loan, you could pay the same amount of interest. A fixed-rate mortgage is usually good for buyers who want to tolerate little to no risk; while an adjustable-rate mortgage, which often starts with lower rates than the fixed-rate loan, has the potential to increase over time.
Loan Estimate Form
Before 2015, buyers were given a Good Faith Estimate by lenders with approximate mortgage payments and interest rates. The Good Faith Estimate was replaced by the Loan Estimate Form in recent years, but it serves the same purpose--to allow borrowers to compare estimates from different lenders. Lenders are required to send you Loan Estimate Forms within three business days after you apply for a loan.
A home inspection is conducted on a contingent property by the potential buyer. During an inspection, a certified professional examines the interior and exterior of the property and flags existing and potential problems or needed repairs in a report. A home inspection is an important part of the buying process because it helps uncover future costs associated with the home as well as any health or safety concerns.
Homeowners insurance typically covers damages from vandalism, theft, and natural occurrences such as falling trees or fire that might happen to your home. Most policies cover medical bills, legal fees, and loss of possessions associated with those damages. While homeowner’s insurance isn’t required by law, most lenders require it as a protection on the house since it serves as collateral for the mortgage.
An interest rate is the amount of interest charged on a loaned amount of money to the borrower. Lenders determine interest rate by evaluating the risk that they take on by giving out the loan, looking at factors including the borrower’s financial history and credit score, the loan-to-value ratio, loan term, and monthly payment amounts.
Loan-To-Value Ratio (LTV)
Mortgage lenders use the Loan-to-value ratio (LTV) to determine how much risk they are taking on by offering the borrower a loan on a property. As the value of the loan increases (meaning that the down payment from the borrower decreases), the loan becomes higher in risk since the loss faced by the lender if mortgage payments aren’t made is greater.
A mortgage refers to a loan taken out to help you buy a property in which the home is used as collateral. If you default on mortgage payments, the lender is entitled to seize your home and sell it off to pay back the loan. This allows lenders to lend the large sums of money required to buy property.
An origination fee is any fee that a lender charges to set up your mortgage loan terms and agreement. Typically, an origination fee is about .5% of the total loan amount. It covers the cost of putting together a loan agreement, including the process of gathering your application materials and the underwriting fee (where a lender examines your application to determine your eligibility).
Primary mortgage insurance, most often referred to as Private Mortgage Insurance (PMI), is insurance charged to the borrower to cover a potential default on their loan. If a borrower puts down a low down payment with a conventional loan or takes out a government-backed mortgage like the FHA loan, they will be required to pay a monthly PMI payment in addition to their mortgage payment.
Property taxes are taxes owed by a property owner to federal and state governments in order to generate revenue for public services such as police protection, school funding, and the maintenance of parks and roads. The amount of taxes owed each year depends on various factors, including state and city tax, property type, and home value.
Property surveys can be conducted at any point during the home buying process to determine property boundaries and any restrictions or hazards that might apply. Surveys are required by lenders in some areas but not in others. If you’re planning on building a new property or adding a structure or fence to your land, a survey will help confirm boundaries and point out any restrictions like floodplains.
Title insurance protects both the homebuyer and the mortgage lender in a transfer of property ownership and ensures coverage in case of a title dispute or any other problems. It is paid in an upfront premium but covers your title as long as you or your heirs retain ownership.
With these terms, we hope you have some helpful context to help you in your search for a property or to find the perfect mortgage loan for your new home. Check out our Mortgage Learning Center to read more about buying and financing properties.