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Glossary of Terms You Should Know
Whether looking for your first home or looking to refinance your existing mortgage, you can come across a lot of new terms. Here are some terms that you should know to help you navigate through the process.
Adjustable Rate Mortgage (ARM)
The interest rates charged on these mortgages are tied to an interest rate index and will change periodically. If the interest rate index rises, the mortgage interest rate and the monthly payment go up. If the interest rate index falls, the mortgage interest rate and monthly payment go down. Common change periods are every year, three (3) years and five (5) years.
Adjustable-Rate Mortgage (ARM) Disclosure
This document describes the features of the adjustable rate mortgage (ARM) program you are considering. It includes information about how your interest rates and payments are determined, how your interest rate can change, and how your monthly payment can change. The lender is required to provide this document to you when you hand in your application or before you pay a nonrefundable fee (whichever is earlier).
This term refers to the gradual paying down of a loan. For example, traditional mortgage terms require that each payment include, in addition to interest, part of the loan principal. That way, you continually lessen the amount you owe and extinguish the debt within a set period of time.
Annual Percentage Rate (APR)
The APR reflects the true cost of a loan expressed as a percentage that enables you to compare (or shop) loan terms of different lenders. The APR takes into consideration points (loan origination fees), the interest rate, and other costs associated with getting the loan.
This is a report containing detailed information on your credit history. The report includes identifying information and details about your credit accounts, loans, bankruptcies, late payments, and recent credit inquiries. Prospective lenders will obtain these reports, with your permission, to evaluate your creditworthiness. Every year, you should order a copy of your credit report and review it for accuracy. It is free and can be obtained at www.annualcreditreport.com
Your credit score is a measure of the risk you pose to someone who wants to lend you money. It is calculated using a standardized formula. There are many factors that could damage a credit score, including late payments and poor credit card use. Lenders may use your credit score to determine whether to give you a loan and what rate to charge. The better your credit score, the lower the rate you can get on a loan.
Debt-to-Income Ratio (DTI)
This ratio represents your monthly fixed expenses divided by your gross monthly income (income before taxes and deductions). The lender uses this ratio to help determine how much it will lend you. If the percentage is greater than 36%, the ratio could negatively impact your credit application because the lender considers you to have too much debt for your income.
Fixed Rate Mortgage
The interest rate remains the same for the life of the loan. The loan term is typically 15 or 30 years.
Good Faith Estimate (GFE)
In this document, the lender estimates the amount of or a range of charges for the specific settlement services that you are likely to incur in connection with the loan closing. The lender is required to deliver or mail the GFE to you within three business days after receiving your completed loan application.
Initial Truth In Lending (Initial TIL) Disclosure
This document discloses the anticipated terms of the legal obligation between you and the lender including the annual percentage rate (APR), the number of payments you will owe and the payment amounts. The lender is required to deliver or mail the Initial TIL disclosure within three business days after receiving your completed loan application.
Loan-to-Value Ratio (LTV)
This ratio compares the value of the loan with the fair market value of the home. The lender uses it to determine if its potential losses (in the event that you do not pay) may be recouped by selling the house.
Private Mortgage Insurance (PMI)
PMI is required by lenders when a loan is originated and closed with less than a 20% down payment. This insurance protects the lender from default losses in the event a loan becomes delinquent. If you are approved for a mortgage that requires PMI, you still have to apply for PMI (the lender will handle). You can be approved for a mortgage and not qualify for PMI.
Title insurance is an indemnity policy that protects you and your lender against problems relating to the property’s title prior to the date of the policy. Title insurance is different than other insurance in that it provides a safeguard against loss from hazards and defects from the past. Title insurance protects you and your lender in case a lawsuit is filed against the title. Owner’s title insurance can be bought for a one-time fee and lasts as long as you or your heirs have an interest in the property. Owner’s title insurance fully protects you if a problem surfaces with the title that was not uncovered during the title search and pays for any legal fees involved in defending a claim against your title to the property. The lender will require lenders coverage. Owner’s coverage is not required but is highly recommended.