1. Annual Percentage Rate
Annual Percentage Rate, APR, identifies the annual cost of a loan, expressed as a
percentage. Your APR includes your interest rate as well as other costs, including
mortgage insurance, closing costs, and any additional loan or broker fees.
Closing is the time and place when all Closing Documents for your loan are
signed, dated, and notarized. Closing documents include your agreed-upon
interest rate, monthly payments, and remaining costs to close the loan.
3. Closing Costs
Closing Costs typically include fees related to title search and insurance,
document preparation, attorney fees, appraisals, and any other relevant work
that is done to secure your loan. Closing costs are due at the time of closing,
and usually costs approximately 3% of your total loan amount.
4. Debt-to-Income Ratio (DTI)
Your Debt-to-Income Ratio is calculated by dividing your monthly debt
payments by your gross monthly income. Monthly debt payments include things
like credit cards, car loans, student loans, and any other additional monthly
expenses. Your gross monthly income is what you earn before taxes. When
divided, your Debt-to-Income Ratio is expressed as a percentage. Typically,
monthly mortgage payments should not exceed approximately 30% of your
gross monthly income.
5. Down Payment
Down Payments often range anywhere from 5% to 20%. Some loan programs
can require as little as 0% down, based on a variety of factors. Your down
payment covers the difference between your loan amount and the purchase
price. The benefit of a larger down payment is eliminating your PMI or
Escrow refers to funds that you deposit with a third party, that are held until a
specific date or condition is met. When you make an offer on a home, your down
payment will typically go to an escrow account while you finalized negotiations
with the home seller. Mortgage lenders will also require a percentage of yearly
taxes to be held in an escrow account which is maintained by the lender.
7. Loan-to-Value Ratio (LTV)
Loan-to-Value or LTV is the ratio between your loan amount and the total
home price you are purchasing. For example, if you apply for an $80,000 loan
to purchase a home that costs $100,000, your LTV ratio is 80% ($80,000 /
$100,000). In this example, the remaining $20,000 that’s needed to
purchase the home would come from the buyer in the form of a down
payment. While the ratio can vary based on the down payment amount and loan
program, 80% is considered a common LTV Ratio.
8. Mortgage Insurance (PMI)
Mortgages are usually paid off over a period between 10 to 30 years. Most
buyers are required to make a down payment as collateral for their loan. While
the required down payment may vary based on loan program requirements,
down payments less than 20% require the buyer to pay for a Private Mortgage
Insurance, also called PMI. Mortgage insurance is required to protect the lender
in case the buyer can no longer afford to pay back the loan. It’s common for
buyers who owe to refinance once they have at least 20% equity in their home.
9. Principal & Interest (P&I)
Principal and Interest, abbreviated to P&I, are two of the most common terms
when it comes to mortgages. Principal refers to the amount of money borrowed.
Interest refers to the amount that is owed for borrowing the money.
10. Interest Rate & Rate Lock
Your interest rate refers to the amount of interest owed on a loan. Unlike APR,
interest rates do not take into account additional fees that may be required for
a loan. While looking for and purchasing a home, interest rates may continue
to change. A Rate Lock is made when a lender guarantees an interest rate to a
borrower for a set period of time.
When you hear the word “term” or “loan term,” it refers to the length of time
to pay off a loan. When purchasing a home, the term is provided in years. Loan
terms are used to determine your overall monthly payment amount and the
length of your term (10, 15, or 30 years) can affect your interest rate as well as
your required down payment.