Whether for a new purchase or a refinance, it's a great idea to do some exploration beforehand to familiarize yourself with the process and what you can expect during your loan application, approval and closing. To help you better understand your options and make an informed decision when it comes to selecting your new home financing, we've gathered some of the most frequently used mortgage industry terms together for you to keep as a handy reference guide. If you have further questions about any of these terms or any other parts of the home loan process, please feel free to give me a call!
Annual percentage rate (APR): this is the actual interest rate you pay to borrow money. The APR includes the base interest rate, points, and any other add-on loan fees and costs. All lenders must follow the same rules to ensure the accuracy of the APR, so it provides consumers with a good basis for comparing the cost of loans from different lenders.
Automated Underwriting: we run your loan application through a computer system that evaluates certain numbers and information to determine if the loan appears to meet program guidelines.
Cash-out Refinance: a refinance where you borrow more than you need to pay off the original loan to get cash in hand. It's an alternative to a home equity loan.
Closing costs: these fees are typically not part of the actual mortgage, and include such costs as title search, origination fees, discount points, prepayment of taxes and insurance, and real estate transfer taxes.
Disclosures: within three days of my receiving your fully completed loan application, you will receive these legal documents that explain your rights as a borrower on a mortgage loan. Disclosures will also show you the details of your loan amount, costs, monthly payments and payback terms.
Discount points: you can pay points at closing as a type of buydown in order to lower your overall interest rate and mortgage payment. One point equals 1% of the home loan value.
Good Faith Estimate: this is a federally regulated estimate of all the fees associated with your closing coats, including pre-paids, escrow items and lender charges.
Home price index: this is an industry tool that provides historical data on residential home prices in various regions.
HUD-1 statement: this document itemizes all of your closing costs and shows the fees you paid, such as real estate commissions, loan fees, points and escrow amounts. Also known as the settlement sheet or closing statement.
Loan modification: your lender may be able to modify the terms of your loan to make it easier for you to continue making payments and avoid foreclosure, without refinancing the loan. Generally it involves reducing the interest rate and thus the amount of your monthly payment for a fixed period of time.
Loan origination fee: the fee you pay for the lender's services in administering your loan.
Loan-to-value (LTV) ratio: your lender will divide the amount of the loan by the asking price of the home and come up with a percentage. A high LTV, such as 90%, means you only have to come up with 10% cash as a down payment, while a lower LTV, such as 70%, means you need to come up with more cash to put down, but you may avoid the need for private mortgage insurance.
Mortgage insurance: when buyers take out a mortgage with less than 20% in cash to put down, lenders require them to pay mortgage insurance, a monthly premium that is added to the mortgage. This protects the lender should a buyer default on the home loan.
Mortgage Qualifying Ratios: these are the front-end and back-end ratios, which we use to calculate how much of your income is spent on your bills and how much will go toward your mortgage.
PITI: principal, interest, taxes and insurance: the four elements of a monthly mortgage payment. Payments of principal and interest go toward repaying the loan, while the payment for taxes and insurance goes into an escrow account to cover those fees when they are due.
Processing fees: lender fees associated with creating the loan or mortgage, usually part of closing costs.
Rate lock: this guarantees your interest rate for a set period of time while you complete the purchase of your home. Rates locks do expire but they can be extended, generally for an additional fee.
Secondary mortgage market: when we originate loans, we often sell them on the secondary market in order to raise more capital for more loans. Investors purchase our residential mortgages as a financial tool.
Truth-in-lending disclosure (TIL): this document discloses your interest rate, loan amount, the amount you will have paid upon the loan's maturity and other relative financial information.
Underwriting: this is where your loan application is analyzed to ensure you will be able to repay the loan.