Gotta Know the Mortgage Lingo Pt. 2
Let's continue getting you up to speed with the most essential mortgage lingo you need to know! If you missed Part 1, you can check it out here.
Fixed-Rate Mortgage: A mortgage with an interest rate that does not ever change during the life of the loan. When market rates fall below your original fixed interest rate, this is when it becomes very beneficial to refinance and take advantage of the lower rates.
Homeowner’s Insurance: prior to the mortgage closing, homeowners have to get property insurance on the new home so the lender is covered from loss in case of a fire or other event.
Interest Rate: The percentage rate that a lender charges to borrow money.
Loan-to-Value: this is a very common financial calculation in the mortgage industry. The Loan-to-Value Ratio (LTV) is actually pretty easy to understand: it’s a percentage and tells you how much of your home purchase is being financed by the mortgage. So, for an LTV of 80%, it means 80% of the home is owned through using debt (a mortgage).
Rate Lock or Lock-in: This is the term for when a lender we are working with guarantees a quoted interest rate for a period of time, usually 15, 30, or 45 days. This allows the mortgage process to happen without the fear of interest rates changing dramatically during that time.
Points: Points are upfront fees paid to the lender at closing of the loan. One point can be thought of as 1% of the total loan amount. Essentially, if you choose to pay points then you can get a lower interest rate for your mortgage, but for most people they opt not to pay any upfront costs like this. If you’re unsure about what you should do, don’t worry, we work with you to help you make the best financial decision.
Pre-Approval: The process involving working with us to get you approved for a mortgage loan without a commitment to receiving it. This allows you to know how much money you’re working with when it comes to house shopping. This process involves providing proof of income, checking credit scores, and any other documentation needed in order to get approved for a loan by a lender. This allows us to help our clients know just how much home they can afford while staying financially secure.
Principal: This is the balance owed on the loan not including interest.
Private Mortgage Insurance (PMI): This is insurance protecting the lender from default of a loan, meaning the borrower pays a monthly premium in order to have it. This is usually required for loans with a loan to value ratio of over 80% (in other words, when you have less than a 20% down payment on your mortgage).
Title Search: Examination of municipal records to ensure that the seller is the legal owner of the property and that there are no liens or other claims against the property. This examination is typically done by a separate ‘Title’ company, apart from the broker.
Underwriting: The process of the lender analyzing the risk of giving away a mortgage, then creating the appropriate terms and conditions for a client’s particular loan.