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Mortgage Terms Home Buyers Need To Know

Mortgage Terms Home Buyers Need to Know

Short summary: One of the challenging things about applying for a home mortgage loan is learning new terminology which is unique to the mortgage application process. This article provides definitions for a few terms which are commonly encountered when a person goes to apply for a home mortgage loan. These definitions may make the task of applying for a mortgage loan easier for new prospective buyers.

The home buying process is complicated. When you buy a home, there are a lot of boxes to check off and variables to take into account. This is particularly true if you’re buying a home with a mortgage loan. The mortgage loan acquisition process adds a whole extra layer of complexity on top of the home purchase. There is a great deal of preparation which goes into the mortgage application process. You need to make sure that you’re financial situation is suited to applying for the mortgage loan. You need to gather copious documentation in order to substantiate your financial situation. You need to build a credit score which is sufficient to obtain a good interest rate. In short, obtaining a mortgage loan isn’t a small task, and it’s something to which you’ll need to dedicate considerable time.

To aid buyers in the mortgage loan process, we’ve put together this short list of words you should take the time to learn. These are mortgage words first home buyers need to know. Learning these common mortgage terms will undoubtedly assist you as you go to apply for an obtain a mortgage loan. Learning new mortgage terms is one of the more challenging aspects of applying for a loan. When you apply, you’re likely to encounter all sorts of foreign phrases which can cause confusion and even intimidation. The good news is there’s no reason to be worried. As long as you put in the time, you’ll be able to educate yourself and find the mortgage loan which is perfect for you. See our 7 Step to Get a Home Loan InfoGraphic! 

Let’s recap, in this post we will cover the following mortgage terms:

  • Amortization
  • Loan-to-Value Ratio
  • Closing Costs
  • Debt-to-Income Ratio
  • Adjustable Rate Mortgage
  • Conventional Loan

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Amortization

In accounting, the term “amortization” refers to the deductions taken over the course of the useful life of an intangible asset. But in lending, amortization refers to a set schedule for the repayment of a loan. A standard amortization schedule will include the amount borrowed, the interest paid on the loan and the time period for repayment. An amortization schedule will therefore spell out exactly how much interest you pay on each payment and exactly how much you’ve paid after a given number of payments. This is a word you’re very likely to encounter when you go through the mortgage loan application process and so it’s key that you understand the definition.

Loan-to-Value (LTV) Ratio

Loan-to-Value (LTV) ratio is another term you’re more than likely see at some point when you apply for a mortgage loan. Simply put, loan-to-value ratio refers to the ratio between the mortgage amount and the appraised value of the home. A good way to think about loan-to-value is to think of it as the remainder after the down payment is made on the home, and this remainder is then expressed as a percentage. For instance, if you make a down payment of 25% of the appraised value of a home, then the LTV would be 75%, because the loan would represent 75% of the home’s overall value.

Closing Costs

The phrase “closing costs” refers to the standard costs which are incurred as a result of closing a real estate transaction. There is a wide variety of possible closing costs. The exact costs will always depend on the specifics of a given transaction. Some closing costs may be paid by the seller, and some may be paid by the buyer. Typical closing costs include things like appraiser’s fees, escrow fees, recording costs, transfer taxes, insurance fees, real estate agent commissions, and so forth. Closing costs need to be borne in mind whenever you plan to buy a home because they can add up to constitute a significant chunk of your overall cost burden.

Related: What are closing costs and how do I avoid paying them?

Debt-to-Income (DTI) Ratio

When you apply for a mortgage loan, lenders will evaluate your eligibility according to numerous criteria. One variable which mortgage lenders will take into account is your debt-to-income (DTI) ratio. Your debt-to-income ratio is simply a measurement of your monthly income and your recurring monthly expenses. This ratio is measured in order to give the lender a sense of how comfortably you can take on additional financial obligations. If your DTI ratio is too high, then the lender may see this as a sign that you may not be able to repay your loan in the event of an unexpected material setback. Here’s an example: if you have a monthly income of $6,000, and recurring monthly debts of $2,500, then your DTI ratio would be 41.6%, because $2,500 divided by $6,000 is approximately 41.6%. Most lenders prefer to see DTI ratios in the low 40 percent range, although a higher DTI ratio may be offset with other factors, such as significant cash reserves.

Conventional Loan

Conventional loans are standard mortgages not guaranteed by the Federal Housing Administration (FHA) or VA. Conventional financing generally requires a larger down payment, although there are options with as little as 3% down. They also have lower debt to income ratio requirements along with higher credit score requirements.

Adjustable Rate Mortgage (ARM)

Unlike a fixed-rate mortgage, an adjustable rate mortgage (ARM) is one which has an introductory rate which then changes over time. Typically, this means a relatively low introductory rate and then higher rates later on throughout the course of the loan. If you obtain an ARM, you need to take into account these higher future rates and be able to service the higher payments which will follow from them. In many cases, the payment structure can change dramatically as a result of these changed rates. ARMs played a big role in the housing crisis of the late 2000s. Many people took on ARMs which they couldn’t service after the introductory low interest rates changed. 

Again, these are just a few of the more common mortgage terms you’re likely to encounter as you enter the mortgage loan application process. You’re likely to encounter many others as well. Hopefully, having these mortgage terms explained will assist you as you begin to explore your options. 

If you’d like to move forward, Sammamish Mortgage is here to make the mortgage application process as easy as possible. We’ve been in the mortgage business for over 25 years and we take pride in delivering personalized service to our clients. With one click, you can View Rates or Apply Now to determine your eligibility. Contact Us today if you’d like to learn more or get the process started.

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