- Amortization: The schedule of periodic payments (typically monthly) that gradually reduces the loan balance and pays off the interest over the life of the mortgage.
- Annual Percentage Rate (APR): The total cost of borrowing, expressed as a yearly rate. It includes the interest rate plus other fees, such as origination fees or mortgage insurance, making it easier to compare different loan offers.
- Appraisal: A professional evaluation of a property’s market value, usually required by the lender to ensure the home is worth the amount being borrowed.
- Closing Costs: Fees paid at the end of the transaction to finalize the loan. These typically include appraisal fees, title insurance, taxes, and loan processing fees, often totaling 2% to 5% of the purchase price.
- Debt-to-Income (DTI) Ratio: A percentage that compares your monthly debt payments (including the new mortgage) to your gross monthly income. Lenders use this to assess your ability to manage monthly payments.
- Down Payment: The upfront cash payment made toward the purchase of a home. While 20% is traditional, many programs allow for much lower percentages.
- Equity: The difference between the current market value of your home and the amount you still owe on your mortgage.
- Escrow: An account where your lender holds funds for property taxes and homeowners insurance, which are paid on your behalf as they become due.
- FICO® Score: A credit score used by most lenders to determine your creditworthiness. Higher scores typically result in better interest rates.
- Loan-to-Value (LTV) Ratio: The relationship between the loan amount and the home’s value. For example, if you put 20% down, your LTV is 80%. Higher LTVs often require private mortgage insurance.
- PITI: An acronym for the four main components of a monthly mortgage payment: Principal, Interest, Taxes, and Insurance.
- Points (Discount Points): Prepaid interest paid at closing in exchange for a lower interest rate over the life of the loan. One point generally equals 1% of the loan amount.
- Private Mortgage Insurance (PMI): Insurance that protects the lender if the borrower defaults. It is usually required for conventional loans with a down payment of less than 20%.
- Underwriting: The process where a lender evaluates your financial documents, credit history, and the property’s value to decide whether to approve your loan.
