October 14, 2020
We realize the mortgage process can be daunting for any home buyers, but NewRez is committed to helping our customers feel confident in anything mortgage-related. To that end, here’s a few often-misunderstood mortgage terms in plain English.
Amortization describes the shrinking of your mortgage as you pay it off. With each mortgage payment you make, part of the repayment is applied towards reducing the principal, while a separate portion of it is applied to the interest. For most loans, you pay more toward interest in the earlier payments. As your loan ages, an increasingly larger portion of the payment gets applied directly to your principal balance.
APR (Annual Percentage Rate)
Many prospective homebuyers confuse the APR, or annual percentage rate, with the interest rate—both of which measure costs associated with your home loan. The interest rate is the cost of borrowing the money for your home, and it determines your monthly payment.
The APR includes the interest rate, but it also consists of other fees like discount points, mortgage broker fees, and some closing costs. The APR is a broader measure, as it calculates the total cost of the home loan. Both APR and interest rates are expressed as a percentage. To get an accurate comparison of loans, you should review both interest rate and APR.
An appraisal is an estimate of how much a property is worth in the market. Lenders require an appraisal when you buy a home to ensure that the asking price does not exceed its value. NewRez will choose the appraiser, and you will be responsible to pay for it. Most appraisals cost between $400 and $700 and can be included in closing costs—although some lenders require payment up front.
These are fees charged by lenders when you purchase a home. Although they vary widely based on the property and its location, they can include the cost of running a credit report, paperwork processing, attorney services, home inspection, and more. These costs can be paid by either the buyer or the seller, and may even be addressed in negotiating the sale of the home.
When you’re at the negotiation table before buying a home, you or the seller may require a contingency, which is a condition that must be met before a contract is legally binding. A common contingency for a home sale is a home inspection. So in this case, the sales contract will not be binding unless and until the purchaser has the home inspected.
Discount points, also called points, allow you to “buy down” (or lower) the interest rate on your home loan. The cost of one discount point is typically equivalent to 1% of the loan amount, and will lower your mortgage rate by 0.25%. For example, on a $250,000 loan with a 4% interest rate, one discount point would cost $2,500 and lower the rate to 3.75%. Buying 3 points would cost you $7,500, and your new interest rate would be 3.25%.
Each year, you may be responsible for paying taxes, homeowner’s insurance, and private mortgage insurance for your home. Lenders may set up an escrow account on your behalf to pay these expenses associated with your property. With escrow, you pay a certain amount each month as part of your mortgage payment to cover these extra costs. Then, these funds are disbursed when the payment for each is due.
A lien is a legal claim against your home by your home loan provider that remains until you’ve paid off the entirety of your mortgage. While your home is used as collateral until the loan is paid, as long as you continue to make payments, your home is not at risk.
LTV (Loan-to-Value Ratio)
Your LTV is the amount of your home loan divided by the value of your home. For example, if you borrow $90,000 for a home with an appraised value of $100,000, your LTV would be 90%. This ratio is important for mortgage underwriting (see below) and for refinancing your loan.
This is the final payment due date for all of the principal and remaining interest on your mortgage. A.K.A. the light at the end of the tunnel!
PMI (Private Mortgage Insurance)
For most traditional mortgages, you will need a private mortgage insurance policy when you put less than 20% down. PMI protects the lender against loss if you default on the mortgage loan.
A lender will “preapprove” a potential homebuyer to confirm that they are eligible for a mortgage and will specify the amount. During the preapproval process, the lender reviews your financial information, including checking your credit score, and verifying income and employment. While not a loan commitment, it demonstrates to sellers that you are dependable and financially stable enough for a mortgage. And it gives you a very good idea of how much you can borrow, and what it will cost.
Similar to preapproval, prequalification is an estimate of how large a mortgage you can afford, based on your financial circumstances over the past 2 years. However, unlike preapproval, there is neither a credit report nor a formal mortgage application involved with a prequalification. Many buyers see this as a first step in the homebuying process and use it as a helpful barometer for how much home they can afford.
The legal document that says you are the rightful owner of your home. It’s a symbol of what you’ve worked so hard for, so cherish it!
This is the process lenders take to determine if a particular mortgage loan application is approved. Many of the things underwriters consider fall under the three C’s: credit, capacity, and collateral. At the end of the day, it is up to the underwriter to approve or decline your loan.
By understanding these mortgage definitions, you’ve already gotten a leg up on many other potential homebuyers. Bookmark this page and get in touch with one of our mortgage professionals to help you through the mortgage process from beginning to end.
Stay tuned to our articles for even more helpful mortgage and homebuying tips