10 Most Misunderstood Mortgage Terms

by | Feb 14, 2022 | Education, Financial, Home Buying, Home Loan

There are many mortgage terms that can be confusing to anyone outside of the mortgage finance industry. If you are considering or in the process of purchasing a mortgage, here are the ten most misunderstood mortgage terms you need to know.

Private Mortgage Insurance (PMI)

Private mortgage insurance is applied to conventional loans that are considered a higher risk. This insurance is used to protect the lender from losses if a client were to default on the loan. PMI will be included in the monthly mortgage payment.

Loan-to-Value Ratio (LTV)

Loan to value is a ratio that expresses the percentage of the loan amount as compared to the appraised value of the home. Each loan program has a different threshold on how high the loan to value can be. Too high LTV can disqualify the loan and in the case of a sale, the price of the home might need to be renegotiated between the seller and the borrower.

Debt-to-Income Ratio (DTI)

Debt to income is the ratio of what your monthly debt payments against your monthly income. Basically, it’s your debt dived by your income. Each loan program has a threshold on how high your DTI can be.

Annual Percentage Rate

The annual percentage rate is the interest rate charged on the mortgage. This is the price the borrower pays to take out the mortgage. There are two main types of rates their definitions are listed below.

Fixed-Rate Mortgage

This mortgage term refers to the interest rate charged on a mortgage that is set for the full loan term.

Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage is the interest rate charged on a mortgage that will fluctuate throughout the loan term.

Discount Points

This mortgage term refers to interest you can pay at the close of a mortgage to lower the interest rate. Basically, this is money you put down upfront to buy down the rate charged on your loan.

Rate Lock

Shopping for a mortgage loan is always a good idea. Different lenders will have different rates. When you do decide on which lender you do want to go with the rate on the loan will be locked, meaning it cannot change for the term of the rate lock, and the loan needs to close during that time, or the rate will need to be re-locked.

Servicer

The servicer of your mortgage does pretty much what the name suggests and services the loan. This is who you will pay your payments to and who sends your mortgage statements. Your servicer can be a different company than the one you received your mortgage from. Loans are sold to different servicers throughout the loan term.

Principal, Interest, Taxes, and Insurance (PITI)

This is the mortgage term used to describe the full loan payment. Besides paying down the principal of your loan you are paying other fees as well, these fees are part of your full loan payment.

Origination Fees

Processing a loan for a borrower costs a lender money and to meet these expenses the lender will charge origination fees. This charge will be a percentage of the loan amount not to exceed 5%.

We hope this clears up any confusion you may have during your mortgage purchase process. If you have more questions about mortgage terms or the home loan qualification process, contact a loan specialist today at VeteransLoans.com!

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