Mortgage Glossary: Terms Mortgage Lenders Use Frequently
If ever speak with a mortgage broker, you might come across several unfamiliar terms. While mortgage consultants do their best to avoid using complex jargon, it still makes its way into conversations because of how frequently they use them!
Fortunately, we’ve put together a glossary of some of the terms mortgage brokers in Ft Lauderdale use frequently. Unless you want to sign up for a mortgage without fully understanding it, it’s important to understand these terms.
Here’s a summary of eight of the most frequently used terms by mortgage lenders.
1. Refinancing
Refinancing refers to the process of paying off an existing mortgage and creating a new one. Mortgage lenders suggest refinancing services to borrowers who are looking for ways to obtain a mortgage on better terms. If a borrower wants to lower the interest and/or increase the term of their home loan, mortgage lenders suggest rate and term refinancing.
On the other hand, if a borrower wants to switch from a small mortgage to a big mortgage and receive the difference in cash, they can use cash-out refinancing.
2. Debt-to-Income (DTI) Ratio
Do you know how much of your income goes toward paying your debts each month? That’s what a debt-to-income (DTI) ratio is! For instance, if you spend a quarter of your income on debt repayments every month then your DTI ratio is 25%.
Different mortgage loans have different DTI requirements. For example, FHA loans require a DTI of 43% while VA loans require a DTI of 41%. If you’re unsure what the DTI requirement is for the home loans you’re interested in, we recommend consulting a licensed mortgage lender.
3. Adjustable-rate Mortgage (ARM)
If you’re looking for home loans that charge extremely low premiums for the first few years, adjustable-rate mortgages are for you!
Adjustable-rate mortgages are home loans that are subject to a low initial interest rate that doesn’t change for a predetermined period. This is known as the ‘fixed period’ and lasts anywhere between 5 to 10 years depending on the type of loan.
Once the fixed period is over, the ‘adjustment period’ kicks in, during which the interest rate on your loan can rise or fall depending on a benchmark like the US Treasury.
4. Amortization
If you work in the finance industry, chances are you know what amortization means! But for those of you who aren’t familiar, amortization refers to the process of spreading out loan repayments over time. In simpler words, it’s when the premiums on a loan are paid off at regular intervals throughout the loan.
Therefore, if a mortgage lender tells you “the loan should be amortized in 20 years,” it means they expect both the loan amount and the interest to be paid in full within 20 years.
5. Prime & Subprime
The main difference between prime and subprime mortgage loans is the type of borrower they’re issued to. Prime home loans are issued to borrowers with solid credit scores, while sub-prime home loans are issued to borrowers with poor credit scores. In simpler words, sub-prime mortgage loans are issued to borrowers who are likely to miss one or more of their repayments.
The interest on subprime loans is higher than on prime loans to compensate mortgage lenders for issuing home loans to risky borrowers.
6. Annual Percentage Rate (APR)
One of the most used terms in the mortgage industry is “annual percentage rate” (APR). It refers to the total interest owed on home loans, including any fees or transactional costs such as commissions. In other words, APR is an accurate reflection of the amount owed on a mortgage.
If you take out a loan and check your borrower’s note, you’ll realize that the interest rate written is lower than the APR. This is because the interest rate on the borrower’s note doesn’t factor in any add-ons.
7. Conforming & Non-conforming Mortgage Loans
The difference between conforming and non-conforming mortgage loans lies in their names. Conforming mortgage loans are subject to requirements set by the Federal Housing Finance Agency, the Home Loan Mortgage Corporation (Freddie Mac), and the Federal National Mortgage Association (Fannie Mae). On the other hand, non-conforming mortgage loans aren’t subject to any formal requirements.
In most states, conforming mortgage loans cannot exceed $647,200. In contrast, there’s no cap on non-conforming mortgage loans.
8. Loan-to-value (LTV) Ratio
It’s common for homebuyers to use a variety of payment methods when purchasing a home. Some homebuyers take out a mortgage for the full amount of the property, while others take a mortgage for part of the home’s appraised value. Loan-to-value (LTV) ratio refers to the percentage of a property’s price the borrower takes out a loan for.
For instance, if a borrower’s LTV ratio is 80%, it means they’re taking out a mortgage to pay for 80% of the price of the property.
Now that you’re familiar with mortgage jargon, we’re confident you’ll hold your own while talking to our team of expert mortgage lenders at Atlantic Home Capital! Our mortgage consultants have numerous years of experience and offer high-quality services in multiple languages. They’ve earned numerous accolades for the quality of their services and help clients apply for everything from investment property loans to conventional mortgage loans NY.
So, are you keen to let a top mortgage broker Farmingville help put your knowledge of mortgage terms to the test? Contact us today!
