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MORTGAGE DICTIONARY AND KEY TERMS

What is a “good faith” estimate?

It is an estimate of the fees that you will pay to close your loan.

What is a cash-out option?

If your equity in your property qualifies, you can refinance with a loan amount greater than your current mortgage - and keep the difference! Use it for home improvement, debt consolidation, or whatever you desired ratio?

Your income, debt, and mortgage payments are the primary factors that affect whether you qualify for a loan. If you do qualify for a loan, you can apply, and I will move to the next step of checking to see if you can be approved.

To determine your qualification, the first thing I will do is divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio. If the resulting percentage falls within a certain range, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio. Again, if the ratio falls within prescribed limits, you are qualified for the loan.

The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.

What is an appraisal and who completes it?

The appraisal determines the value of the property in question, which becomes a prime factor in determining the loan-to-value - or LTV - ratio (the amount of your loan divided by the value of your property). Your LTV is important because it determines your equity in the property. With the exception of leveraged equity and some second mortgages, I will arrange an appraisal of your property to verify its value. An appraiser is an authorized professional who estimates the value of the property and sends the information to you and I.

What is PITI?

PITI is the acronym referring to the above-referenced components of your monthly mortgage payments. That is, each month your payment to your lender will consist of:

Funds to be applied to the principal - to repay the actual money you borrowed

Funds to be applied to the interest - to repay the interest you’re being charged on the loan, over the life of the loan

Funds being collected in an impound/escrow account to pay your property taxes when they come due

Funds being collected in an impound/escrow account to pay your hazard/fire Insurance when it comes due

What is PMI?

Private Mortgage Insurance (PMI) is usually mandatory for loans when the ratio of the amount of the loan to the value of the subject property is greater than 80 percent - that is, 80.01 percent% or more of the property is being paid for by the loan. Loan-to-value ratio (LTV) knows this as the loan. Basically, the lower your Loan-to-value ratio, the higher your equity in the property. You can think of equity as the part of your property you actually own. If you sold your property (for its appraised value), equity is the amount of cash you’d have left after you repay your loan balance in full.

Common wisdom holds that the more equity a borrower has in a property, the lower the risk of defaulting on the loan. Thus, Private Mortgage Insurance (PMI) must be paid for lower equity (high LTV) loans to safeguard the lender from possible loan defaults.

What is prequalification vs. preapproval?

As a loan officer, prequalification and preapproval are based upon the information you provide in the online application. Because this preapproval is based on information provided to me verbally and as set forth on the application, it is considered conditional loan approval.

The conditional approval is subject to the verification and/or receipt of additional information. Once all closing conditions and lender requirements are satisfied, the loan will receive final approval.

What is roll in refinancing?

Rolling in your loan costs is especially attractive when refinancing. By rolling in your costs, you incur no expenses, thus you have no “payback period.” The payback period is the time required to recoup the cost of your new loan through the monthly savings you get from the difference between your new lower payments and your old ones. For example, if your new loan’s payments are $100 a month less than your old one, but you had to pay $1,200 to refinance, you’d have a payback period of 12 months before you’d actually start saving. By rolling in the cost of your refinance, your actual savings begin immediately. Rolling in your costs is particularly appropriate if you’re planning to sell or refinance again in a few years because, in this case, it doesn’t really matter that your loan amount is higher as long as you enjoy savings right now.

What is the difference between an Equity Line of Credit and another type of second mortgage?

An Equity Line of Credit is money in an account that can be used as you need it. You can use any portion of it at any time and pay it back at any time. The interest rate is usually variable and is tied to the prime rate. Other types of second mortgages, such as the Home Equity Loan and 125 percent Freedom Loans are simple interest products. You borrow a lump sum and pay it back over a period of years with interest. The interest rate for these products is fixed.

What are closing costs?

Closing costs are sometimes also called settlement costs. These are the costs a lender charges for funding and completing your loan and are generally charged at the time of closing (or settlement). They often include discount points, which are fees paid to lower your interest rate. Settlement costs/closing costs vary greatly depending on your state, county, and/or metropolitan area. They also vary from one lender to another, so it pays to shop around.

What are income, debt, and mortgage payments?

These are the primary factors that effect whether you qualify for a loan. In order to determine if you qualify for a loan, your lender will calculate two defining ratios: the housing-to-income ratio and the debt-to-income ratio. The first of the two ratios, the housing-to-income ratio, is calculated by dividing the monthly payment of your proposed loan by your gross monthly income. If the resulting percentage falls within a predetermined range, the lender will then go on to calculate your debt-to-income ratio. The debt-to-income ratio is calculated by dividing your total monthly debt by your gross monthly income. Once again, if this ratio falls within prescribed limits, the lender will qualify you for the loan. The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.

What are prepaid interest and impound/escrow funds?

Prepaid interest and impound/escrow funds are costs generally associated with a mortgage. At the time of closing your loan, a lender will often require you to provide the funds to establish your impound/escrow accounts (so your taxes and insurance can be paid on time) and to pay the interest for the time period between the loan closing date and the end of the closing month.

What are rates, terms, and APR?

All mortgages have an interest rate, a term, and an annual percentage rate (APR). For example, a mortgage might be defined as a 30-year fixed-rate loan at 7.625 percent, with an APR of 7.800 percent. In this example, the mortgage term is 30 years. As the borrower, you will pay back the loan in installments over the course of 30 years.

The interest rate in this example is 7.625 percent. This means you must pay interest on the money you’ve borrowed at a rate of 7.625 percent per year. That is, in addition to paying back the loan, you will pay your lender an additional 7.625 percent of the current loan balance every year. This interest is basically the fee your lender charges you in return for lending you the money.

The annual percentage rate (APR) is a measure of the cost of credit, expressed as a yearly rate. Because APR includes points and other costs such as origination fees, it’s usually higher than the advertised rate. The APR allows you to compare different mortgages based on actual annual costs.