When it comes to obtaining a mortgage, there are numerous key terms and phrases that borrowers need to understand. From interest rates to loan-to-value ratios, these terms can be complex and overwhelming for first-time homebuyers. In this blog, we’ll explore the top used mortgage key terms and what they mean, so borrowers can confidently navigate the process.
1. Mortgage Interest Rate
The interest rate is the percentage charged by the lender for borrowing money. This rate is applied to the amount borrowed and determines the borrower’s monthly payment amount. Interest rates can be fixed or adjustable, and borrowers should compare rates from different lenders to find the most favorable terms.
2. Loan-to-Value (LTV) Ratio
The LTV ratio is the ratio of the loan amount to the appraised value of the property. This ratio helps lenders determine the risk of the loan, and borrowers with a lower LTV ratio may be eligible for better interest rates and loan terms. Typically, borrowers with an LTV ratio of 80% or lower are required to purchase private mortgage insurance (PMI).
3. Closing Costs
Closing costs are the fees associated with obtaining a mortgage, including fees for appraisals, credit reports, and title searches. These costs can range from 2% to 5% of the loan amount and are typically paid by the borrower at the time of closing.
Amortization is the process of paying off a mortgage over time through a series of regular payments. Each payment is divided between the principal amount and the interest owed on the loan, with the majority of the payment going toward interest in the early years of the mortgage and gradually shifting to principal as the loan is paid down.
Pre-approval is the process of getting approved for a mortgage before making an offer on a home. This process involves submitting financial documents to the lender, such as tax returns and bank statements, and the lender reviewing the borrower’s credit score and financial history. Pre-approval can give borrowers a better understanding of their budget and can help streamline the homebuying process.
Escrow is a separate account where a third party holds funds for the buyer and seller during the homebuying process. These funds may include the down payment, closing costs, and property taxes and insurance. The funds are released to the appropriate party once all conditions of the sale have been met.
7. Mortgage Points
Points are a fee paid upfront to the lender in exchange for a lower interest rate. One point is equal to 1% of the loan amount, and borrowers can often choose to pay points to lower their monthly mortgage payments over the life of the loan.
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In conclusion, understanding the above key terms is essential for navigating the home buying process. By familiarizing themselves with these terms, borrowers can make informed decisions and find the best options for their needs. With the help of a knowledgeable lender, borrowers can confidently navigate the complex world of mortgages and achieve their dream of homeownership.
Ultimately, by combining their own knowledge with the expertise of a trusted lender, prospective homeowners can set themselves up for success in achieving their long-cherished dream of homeownership. So take the leap, arm yourself with knowledge, and partner with a trusted professional to make your homeownership dreams a reality.