Common Mortgage Terms to Know

If you’re buying or refinancing a home, then you’ve probably come across some terms that made you think, “Huh? What does that mean?” Honestly, you wouldn’t be alone! Real estate financing has its own terminology that can be perplexing, especially for first-time buyers. That’s why we’ve created this list of common mortgage terms that might be confusing but you should know.

Debt-to-income ratio

When you’re applying for a mortgage, the lender will want to know your debt-to-income ratio. Simply put, this is a ratio of how much total monthly debt you have compared to your monthly gross income. Lenders will look at this ratio to determine how much money they can lend you and prefer to see a debt-to-income ratio of less than 50 percent.

Loan-to-value ratio

Another ratio that lenders will be looking at is the loan-to-value ratio. This ratio basically compares the amount of a loan to the value of the house. A higher loan-to-value ratio means a higher risk loan, which may mean higher interest rates for the borrower. You can lower your loan-to-value ratio by making a larger down payment so you’ll need to borrow less money.

Private mortgage insurance (PMI)

Private mortgage insurance is required on loans where a borrower did not pay at least 20 percent for the down payment. This insurance is paid to help protect the lender in case the borrower defaults on the loan. To avoid paying PMI, make a down payment of at least 20 percent.

Discount points

If you want to reduce your interest rate on your home loan, then you can opt to pay discount points or mortgage points when you close. These are fees you pay in order to buy down your interest rates. The more points that you pay for, the lower your rate will be. Generally speaking, one point costs about one percent of the loan. That means one point on a $400,000 loan would cost $4,000. Essentially, it’s a way to pre-pay the interest.

Principal, interest, taxes, and insurance (PITI)

If you hear the term PITI, it refers to your total monthly mortgage payment. This payment often includes your loan principal and interest, homeowners insurance, property taxes, and private mortgage insurance if your lender requires it.

Loan servicer

While you might get your loan from one company, it may be another company that actually services the loan. The loan servicer is the company that sends your mortgage statements, collects your payments, and distributes payments for property taxes and insurance.

Underwriting

Once you submit your mortgage application, it will be reviewed by the underwriting department. The underwriters will make sure that you have all the necessary documents to close on your loan. They also will determine your credit risk by looking at your credit score, income, employment, and assets, among other things.

Rate lock

Shopping around for a mortgage can take time, and rates will fluctuate from day to day. When you choose a lender and agree to the terms of a loan, you will want to lock in your interest rate, which is known as a rate lock. This ensures that your rate won’t increase before you close. However, be aware that you are locked into this rate even if the rate goes down before closing day.

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