Mortgage Terms to Know when shopping for a Loan
As a consumer, it is very important to be able to talk the lingo, when it comes down to researching a service or product. Below, we will go through the most common mortgage terms that will help you navigate through the mortgage process smoothly.
Fixed Rate Mortgage: A loan that has a fixed rate for the entire term of the loan.
Adjustable Rate Mortgage(ARM): A mortgage whose interest rate paid on the outstanding balance varies according to specific Indexes. The two(2) most common indexes used are the LIBOR(London Interbank Offered Rate) and the T-Bill(Treasury). An adjustable rate mortgage is equal to the index it is based on plus the margin the lender offers on the loan.
Loan To Value(LTV)- A Financial term used to represent the ratio of the mortgage liens as a percentage of the total appraised value. Example: If you borrow$85,000 on a mortgage for a property appraised at $100,000, your loan to value(LTV) would be 85%. Loan to Value(LTV) is one of the main risk factors that lenders assess when qualifying borrowers for a mortgage. The Appraised value is usually determined by a licensed appraiser to give fair market value. Lower Loan to Value(LTV) ratios generally lead to lower interest rates.
Debt to Income Ratio(DTI)- The percentage of the borrowers monthly gross income that goes toward paying debts, including the current or proposed mortgage. There are two(2) types of Debt to income Ration(DTI).
1) Front End Ratio– The percentage of Gross Income that goes toward housing payments, know as PITI or Principle, Interest, Taxes and Insurance.
2) Back End Ratio-The Percentage of Gross income that goes toward paying total debt payments, that include, PITI, Credit cards, Car payments, Child support, student loans, alimony and any other installment loans.
Points– One point is = to One percent of the loan amount.
Origination Points– A fee paid by borrowers to lenders to compensate them for assisting in originating and getting their loan closed.
Discount Points– A Prepaid interest mortgage borrowers can pay to lower the interest rate on a mortgage.
Uniform Residential Loan Application(1003)- Standard application filled out by a mortgage professional for a borrower in a mortgage transaction.
Federal Housing Administration(FHA)- Unites States Government agency created as part of the National Housing Act of 1934. It sets standards for construction and underwriting and insures loans made by banks and other private lenders.
Fannie Mae– Federal National Mortgage Association- A government sponsored enterprise(GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market.
Freddie Mac– Federal Home Loan Mortgage Corporation- The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases.
Conforming Loan Limit– the maximum loan amount allowed by Fannie Mae/Freddie Mac to be eligible to get financed by either agency.
Jumbo Loan– Any loan amount greater than the Fannie Mae/Freddie mac conforming loan amount($417,000)or the conforming high balance loan limit in certain areas. Typically, any loan above $417,000 is considered Jumbo.