You know the saying, “knowing is half the battle”? In terms of mortgages, the more you know, the more of the battle you’ve won.
That’s because it’s all about prep-work with a mortgage, and if you understand what you’re facing, and what the many terms actually mean, you’re that much better prepared.
So for the sake of knowing, understanding, and conquering that battle, here are seven mortgage terms, defined.
1) Debt-to-income ratio (DTI): Diving a borrower’s monthly financial obligations by his monthly income, a lender comes up with the DTI, which is how much they think the borrower can afford. Lenders generally don’t want the home payment to be more than 28% of the income.
2) Private mortgage insurance (PMI): In cases where a borrower cannot put down 20%, the loan may still be approved, but the borrower will pay PMI to the lender. It essentially protect the bank in case of a default.
3) Adjustable-rate mortgage (ARM): This is a loan whose interest rate can change based on a mortgage index. These loans are somewhat risky; they often have a lower rate than a fixed loan at first, but they can rise in the future.
4) PITI: PITI—principal, interest, taxes, insurance—is a long term, or fancy acronym, for the total monthly house payment. Lenders divide PITI by income to determine DTI.
5) Good faith estimate (GFE): Lenders must provide borrowers with a GFE, a document that estimates the mortgage costs. It includes closing and appraisal fees, insurance, etc., but can differ slightly than the actual mortgage payment in the end.
6) Loan-to-value (LTV): Mortgage lenders love ratios, and this is an especially important one. The LTV tells them how risky a potential borrower/loan is. The lower the LTV, the less risky the borrower; this can result in a lower interest rate.
7) RESPA: The Real Estate Settlement Procedures Act is a federal act that governs mortgages. It sets the requirements of lenders, including providing borrowers with a GFE within three days of application.
If you’re buying or selling a home in the Boston area and are in need of a mortgage, or simply have mortgage-related questions, contact me at any time for advice or help.