It’s inevitable to start the mortgage application process after you’ve worked with a Realtor®, selected a house, and now need financing to move forward. Yet, the process remains one of the most dreaded for potential homebuyers, and part of that reason stems from the amount of new terminology thrown at them.
Although there are plenty of words to touch on (most of which can be read within McCue Mortgage’s extensive glossary), five of the most important are as follows:
Annual Percentage Rate: Also known simply as APR, this term pertains to the rate of interest paid back to the mortgage lender. Interest is either a fixed or adjustable rate for the life of the loan.
Amortization: Particularly crucial with adjustable rate mortgages, amortization describes the repayment schedule: The amount borrowed, the interest rate paid, and the term, all broken down monthly into specific amounts. The total indicates how much gets paid on the amount borrowed.
Debt-to-Income Ratio: Mortgage applications involve various ratios indicating how well a borrower can pay back a mortgage and just how much of an amount he can handle. The debt-to-income ratio allows the lender to determine if the borrower can repay the loan on time. The amount comes from calculating all monthly payments, including the mortgage, the borrower needs to make and dividing that by monthly income. Higher percentages mean greater risks.
Escrow: At closing, the borrower sets aside a percentage of yearly taxes, which the lender then holds onto. The lender continues to collect amounts monthly, maintains the escrow, and sends the borrower tax bills on a regular basis.
Private Mortgage Insurance: Also called PMI, this involves first calculating the loan-to-value ratio; if it’s above 80 percent, the lender often refuses the transaction. The borrower can compensate by getting PMI, which essentially covers the lender against defaults until the borrower gets below 80 percent. The borrower, in turn, pays a monthly premium.