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Summary: The mortgage world is filled with jargon that many might not be familiar with. If you plan to buy a home and take out a mortgage to finance it, there are some acronyms you should know, which we will discuss in this article.
“Will you need PMI because of your LTV, and how does your APR affect your ARM?” Say what?
Banks and mortgage lenders often use industry acronyms that leave borrowers scratching their heads. First-time home buyers, in particular, have a hard time wading through the alphabet soup. So we thought it would be helpful to explain some of the most common mortgage acronyms in Washington you’re likely to encounter when buying a home.
APR: The APR, or annual percentage rate, represents the full cost of a mortgage loan. It includes the interest rate plus any other fees and points you might encounter during the lending process. Because of these added “ingredients,” the APR is usually higher than the actual mortgage rate that’s applied to your loan. It’s also a good way to understand the full cost.
ARM: An adjustable-rate mortgage loan, or ARM, has an interest rate that can change or adjust over time. And it might go up or down, depending on market conditions at the time of adjustment. This makes the ARM different from the fixed-rate mortgage (FRM), which carries the same interest rate for the life of the loan. While the FRM is more popular among home buyers in Washington, the ARM can be useful in certain scenarios.
DTI: The debt-to-income ratio, or DTI, is a tool lenders use when reviewing applicants for a mortgage loan. As the name suggests, it compares (A) the amount of money a person spends on recurring debts, and (B) the amount of money he or she earns each month. These days, most mortgage programs have a maximum debt-to-income ratio limit somewhere between 45% and 50%. But that’s not always written in stone.
FHA: Home loans that are insured by the Federal Housing Administration are referred to as FHA loans. The program is popular with first-time buyers, though it’s not limited to that group. The FHA (part of HUD) insures loans against default-related losses, giving lenders an added layer of protection.
As a result, the qualification requirements for borrowers can be a bit more relaxed. Home buyers can make a down payment as low as 3.5% with this program. In contrast, a mortgage loan that’s not insured by the government is referred to as a “conventional” loan.
LTV: The loan-to-value ratio, or LTV, is another important concept that home buyers in Washington should know about. This number, usually expressed as a percentage, compares the amount of money you are borrowing (or your outstanding loan balance) to the home’s market value.
For example, a homeowner with a $200,000 loan balance on a property that’s worth $250,000 has an LTV of 80%. When the loan-to-value for a conventional mortgage rises above 80%, private mortgage insurance is usually required (see “PMI” below).
PITI: We covered PITI in a recent article. This acronym is used to describe the four components that make up a typical mortgage payment. In order, the letters stand for principal, interest, taxes and insurance.
Insurance can refer to both homeowners insurance and, for some borrowers, mortgage insurance. This is another important acronym for home buyers in Washington to understand.
PMI: Private mortgage insurance, or PMI, is usually required for home loans with an LTV higher than 80%. In other words, if your loan accounts for more than 80% of the current property value, you’ll probably have to have mortgage insurance.
But there’s an upside here as well. Without PMI, the typical home buyer in Washington would have to wait a lot longer — and save a lot more money — to make a down payment on a house.
These are by no means the only mortgage-related terms out there. But they are some of the most common mortgage acronyms you are likely to encounter when buying a home in Washington state.
Are you ready to buy a home and need a mortgage to finance it? Sammamish Mortgage can help. We are a local, family-owned company based in Bellevue, Washington. We offer mortgage programs to borrowers across the entire state, as well as Oregon, Colorado, and Idaho. Please contact us if you have mortgage-related questions.
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