Mortgage Lingo: Making Sense of the Most Common Acronyms
Mortgage lingo is often expressed in acronyms. You don’t need to know them all, but this article reviews the ones that are more common or important.
The real estate and mortgage industries love acronyms. “APR,” “LTV,” “HELOC,” and countless others can be found on documents and information from industry professionals all across the country. Sometimes it seems like our industry is intentionally trying to confuse people!
But buying a home and taking out a mortgage does not need to be confusing. In fact, with a little preparation and just a small amount of research, you can approach each real estate transaction with confidence.
The real estate industry can seem like a confusing alphabet soup, but with a little knowledge, it will be far less intimidating and much more enjoyable.
Real Estate and Mortgage Lingo: The Acronyms You Need to Know!
Annual Percentage Rate
This is interest rate you pay on a loan annually. Essentially, it’s the cost of borrowing money that you pay to the bank, and it’s the rate that the total amount increases annually. In a simple explanation, if you have a loan balance of $400,000, you would add 5% to this amount. (This does not take into account balance reduction due to payments.) Remember, the lower the APR, the better.
Adjustable Rate Mortgage
Often referred to as an “ARM loan,” this is a form of mortgage financing that has an interest rate that changes. Most ARM loans are structured with an initial period of locked interest, then the rate will be adjusted to current market conditions, usually changing annually.
This is the total amount of money you pay in debts compared to your total income. In most cases, this figure, called a “DTI ratio” is calculated using monthly figures (As most debt payments are scheduled monthly). For example, if you have monthly debt-payment total of $2,000, and a monthly income of $6,000, your DTI is 25% (Your debts take 25% of your monthly income.)
Federal Housing Administration
A section of the Department of Housing and Urban Development, the FHA is one of the most important government agencies in the real estate industry. They serve many functions, but overall their goal is to encourage and support homeownership among all Americans. The most well-known aspect of their work is the “FHA loan,” which, although they don’t lend money, is a form of financing that is financially supported this organization.
Good Faith Estimate
This is a document that lists the terms of a mortgage loan that the lender will offer. Basically, it’s an estimate of payments that will need to be made to the lender if the loan is finalized. This document allows borrowers and buyers to compare various loans, and people are not required to accept the terms once a GFE is issued. The GFE will include itemized fees, such as loan fees, title charges, and government charges.
Home Equity Line of Credit
Essentially, this is a line of credit that has your home as the securing collateral. It is not a sum-total loan (you’re not given, say, $30,000 that needs to be repaid), but instead a line of credit from which you can make withdrawals, similar to a credit card. They often have lower interest rates and more acceptable terms, largely because the loan is secured by your home. However, this means that if you default on the loan, the bank could potentially seize your house, which can make them more risky.
This is a document, usually around three pages long, that outlines the total costs that can be expected from a loan. It is similar to a GFE, and in many cases serves the exact same function, but is simply a newer, more modern document. Like a GFE, it includes itemized fees and other costs that will be paid by the borrower.
This is simply the officer or agent who is servicing your loan and helping you get approved for the appropriate financing. Although this two-letter acronym is not particularly common, you may find it on industry documents and some government information.
Letter of Explanation
This is simply a letter explaining any negative information on your credit profile. When a lender or loan officer is looking at your profile, they will be searching through a variety of information to make sure you have the capability to repay the loan. If they come across any issues, such as inconsistencies in employment or past bankruptcies, they may decide to decline the loan application. With a letter of explanation, however, you may be able to explain the situation and save the application. For example, a letter of explanation could outline a past divorce that lead to a past bankruptcy.
Usually referred to as the “LTV ratio,” this is simply the total loan amount compared to the value of the property. If a property is worth $1 million, the borrower provides a downpayment of $250,000, and the bank loans $750,000, the LTV is 75%. Generally lenders prefer to keep the LTV low; anything approaching 95% will create higher levels of risk.
Principle, Interest, Taxes, Insurance
This is the sum total of your homeownership payments. Basically, this is the total of your monthly mortgage payments, assuming the lender pays the taxes and insurance, which is usually the case with most loans.
Private Mortgage Insurance
Essentially, this is an insurance policy that protects the lender from default on a loan. If the borrower is unable to repay, this insurance policy provides financial compensation, reducing their risk. Although it is paid by the borrower and protects the lender, the availability of PMI makes mortgages more readily available for thousands, possibly millions, of borrowers across the country.
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