Many mortgage terms are confusing to buyers, especially first-time home buyers who are unfamiliar with the buying and loan application process. Here is a quick glossary to help you in your home buying process.
Adjustable Rate Mortgage (ARM): A type of mortgage in which the interest paid paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
Annual Percentage Rate (APR): The cost of credit expressed as a yearly rate. For closed-end credit, such as mortgages, the APR includes the interest rate, points, broker fees, and other credit charges that the borrower is required to pay.
HUD1 Statement: Also known as the “settlement sheet” or “closing statement” it itemizes all closing costs; must be given to the borrower at or before closing. Items that appear on the statement include real estate commissions, loan fees, points and escrow amounts.
Interest: The rate used to determine the cost of borrowing money, usually stated as a percentage and as an annual rate.
Loan to Value (LTV) Ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
PITI: Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
PMI: Private mortgage insurance, as distinguished from insurance provided by government under FHA (Federal Housing Administration) and VA (Veteran’s Administration).
Principal: The amount of money borrowed or the amount still owed on a loan.
Underwriting: The process of examining all the data about a borrower’s property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.