Mortgage Lingo – Part 1: Fifteen terms & phrases you ought to know
If you’re in the market for a mortgage, be prepared for a whole new vernacular. To help, we pulled together the ultimate guide of 30 terms you might come across, but it was a beast. So we split it into two blog posts, with 15 this week and 15 next week — all presented alphabetically.
1 – Amortization
This is a fancy word for the simple act of paying down your mortgage’s principal over time. By paying a little every month, the amount you borrowed will be paid off, or fully amortized, at the end of the term of the loan — usually 15-30 years.
2 – Annual percentage rate (APR)
The APR is a standard way to calculate a mortgage’s true cost, including things like interest, mortgage insurance and points (more on that later).
3 – Cash-Out Refinance
This is like a regular refi, but borrowers take equity out of the home and use that cash for other purposes which don’t have to be related to home renovations or repairs — it can even be used for tuition, high-interest debt or other costs..
4 – Closing costs
On closing day — the day you finalize your loan and get the keys to your new house — you’ll need your wallet because there definitely will be fees. These are typical expenses incurred by buyers — and by sellers — when transferring property ownership. Closing costs usually cover an attorney’s fee, escrow payments, origination fee, taxes, title search, title insurance and paying off any points you requested to reduce the internet rate.
5 – Conventional Loan
A conventional loan is any mortgage not insured or guaranteed by the US government. Compared to government-backed loans like FHA loans (backed by the US Federal Housing Administration), VA loans (backed by the US Department of Veterans Affairs) or USDA loans (backed by the US Department of Agriculture), conventional loans require a higher down payment, a higher credit score and a lower debt-to-income ratio to qualify.
6 – Co-signer
A mortgage co-signer is a person who is there to help the primary borrower get approved for a mortgage — especially if the main borrower’s credit history or income is not sufficient enough to qualify for a loan on their own. Since the co-signer’s creditworthiness and income are taken into account when determining the amount and the terms of the loan, they’ll be equally responsible for repayment. If the primary borrower ever needs help making payments, the co-signer should be ready to jump in and save the day.
7 – Credit Score
A credit score is a three-digit number — typically between 300 and 850 — that indicates how likely you are to pay your bills on time. They’re calculated using the info in your credit reports, your payment history, how much debt you have and how long you’ve been trusted using credit. Higher scores show responsible credit behavior and can result in a more favorable rate when you borrow money.
8 – Debt-To-Income Ratio (DTI)
Your DTI measures how much of what you earn every month goes to paying off debt. To calculate it, lenders divide your gross monthly income by your total monthly debt. So, if you have $100 per month in debt payments and $4,000 in income, your debt-to-income ratio would be 25%. Lenders use DTI to figure out how much you can afford to borrow. A general rule of thumb is to keep your DTI at or below 43%.
9 – Down Payment
This is the amount of money you, the buyer, pay out of pocket towards purchasing the house. By putting down from 3.5% – 20% of the total purchase price, you end up borrowing less. Putting down cash up front means you’re taking out a smaller mortgage (and will have smaller monthly payments).
10 – FHA Loan
This mortgage — insured by the Federal Housing Administration — is popular with first-time home buyers because it allows for down payments as low as 3.5%. And that entire amount can be a gift from parents, relatives or an employer. FHA loans also allow borrowers to have lower credit scores, which would not be permissible with other loans. However, borrowers will need to take out Private Mortgage Insurance, which protects the lender if a new homeowner defaults.
11 – Fixed-Rate Mortgage
This is a mortgage whose interest rate remains the same throughout the loan term. They are the most popular form of home loan in the USA mainly because the monthly mortgage payment is consistent and reliable, making it easier to budget your finances. Fixed-rate mortgages do, however, have higher mortgage payments than adjustable-rate mortgages.
12 – Good Faith Estimate (GFE)
A GFE is a standardized letter from a lender estimating the total costs associated with borrowing money from them. It outlines loan charges, third-party fees and other closing costs. The GFE must be issued within three business days of receiving your application. Then it’s good for ten business days, during which the lender must honor it — that is, unless something has changed dramatically (like you lost your job, incurred substantial debt or failed to secure the interest rate within the agreed-upon time frame.)
13 – Home Equity
While you pay down your mortgage and neighborhood property values rise, the total value of your home increases. That’s your home equity — the difference between the current value of the house and the amount still owed on the mortgage. In essence, home equity is the percentage of the home that you actually own at that point in time. And you can borrow against it!
14 – Home Equity Line of Credit
A Home Equity Line of Credit (also called a HELOC) is an open credit line secured by the equity in your home and it works similarly to a credit card, allowing you to borrow up to an approved line of credit. Pay it back and borrow against it repeatedly at the same low rate.
15 – Interest-Only Mortgage
This is similar to an adjustable-rate mortgage, but unlike a regular mortgage where your monthly payments include both principal and interest, an interest-only mortgage allows borrowers to pay just the interest for the first several years. Because you’re just paying off the interest, you’re not building any equity in the home. And while your monthly payments are lower for a time, they won’t always be this way. When the interest-only period ends and you start paying off the principal, expect to get hit with a big jump in monthly payment amounts.
More to come!
Next week we’ll have 15 more home financing terms to run through. And best of all, no pop quiz at the end!