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Please select from one of the following questions for more information:
>> CLICK HERE FOR GLOSSARY
What is a "good faith" estimate? (back to top)
It is an estimate of the fees that you will pay to close your loan.
What is a cash-out option? (back to top)
If your equity in your property qualifies, you can refinance with a loan amount greater than your current mortgage - and keep the difference! Use it for home improvement, debt consolidation, or whatever you desire.
What is a housing-to-income ratio? (back to top)
Your income, debt, and mortgage payments are the primary factors that affect whether you qualify for a loan. If you do qualify for a loan, you can apply, and a lender will move to the next step of checking to see if you can be approved.
To determine your qualification, the first thing a lender will do is divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio. If the resulting percentage falls within a certain range, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio. Again, if the ratio falls within prescribed limits, you are qualified for the loan.
The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.
What is an appraisal and who completes it? (back to top)
The appraisal determines the value of the property in question, which becomes a prime factor in determining the loan-to-value - or LTV - ratio (the amount of your loan divided by the value of your property). Your LTV is important because it determines your equity in the property. With the exception of leveraged equity and some second mortgages, a lender will arrange an appraisal of your property to verify its value. An appraiser is an authorized professional who estimates the value of the property and sends the information to the lender who ordered it.
What is an impound/escrow account? (back to top)
An impound account or an escrow account (the terms are interchangeable; each is used in different states) is the name of the account in which a lender collects payments you make toward your property taxes and hazard/fire insurance. If you have an impound/escrow account, each of your monthly payments will contain a fraction of your annual property tax and insurance costs. Your lender keeps these funds in the impound/escrow account and then pays your taxes and insurance directly when they become due.
What is an income-to-debt ratio? (back to top)
Your income, debt, and mortgage payments make up your income-to-debt ratio. These are the primary factors that affect whether or not you qualify for a loan. If you do qualify for a loan, you can apply, and a lender will move to the next step of checking to see if you can be approved. To determine your qualification, the first thing a lender will do is divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio.
If the resulting percentage falls within a certain range, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio. Again, if the ratio falls within prescribed limits, you are qualified for the loan.
The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.
What is PITI? (back to top)
PITI is the acronym referring to the below-referenced components of your monthly mortgage payments. That is, each month your payment to your lender will consist of:
- Principal - Funds to be applied to the principal - to repay the actual money you borrowed
- Interest - Funds to be applied to the interest - to repay the interest you're being charged over the life of the loan
- Taxes - Funds being collected in an impound/escrow account to pay your property taxes when they come due
- Insurance - Funds being collected in an impound/escrow account to pay your hazard/fire Insurance when it comes due
What is PMI? (back to top)
Private Mortgage Insurance (PMI) is usually mandatory for loans when the ratio of the amount of the loan to the value of the subject property is greater than 80 percent - that is, 80.01 percent% or more of the property is being paid for by the loan. Loan-to-value ratio (LTV) knows this as the loan. Basically, the lower your Loan-to-value ratio, the higher your equity in the property. You can think of equity as the part of your property you actually own. If you sold your property (for its appraised value), equity is the amount of cash you'd have left after you repay your loan balance in full.
Common wisdom holds that the more equity a borrower has in a property, the lower the risk of defaulting on the loan. Thus, Private Mortgage Insurance (PMI) must be paid for lower equity (high LTV) loans to safeguard the lender from possible loan defaults.
What is pre-qualification vs. pre-approval? (back to top)
Pre-qualification is based upon the verbal information a borrower has relayed to the lender and becomes the basis of what the borrower is qualified to borrow. A pre-approval can be given once all of the supporting documentation has been sent in to the lender by the borrower and is verified as accurate.
What is roll in refinancing? (back to top)
Rolling in your loan costs is especially attractive when refinancing. By rolling in your costs, you incur no expenses, thus you have no "payback period." The payback period is the time required to recoup the cost of your new loan through the monthly savings you get from the difference between your new lower payments and your old ones. For example, if your new loan's payments are $100 a month less than your old one, but you had to pay $1,200 to refinance, you'd have a payback period of 12 months before you'd actually start saving. By rolling in the cost of your refinance, your actual savings begin immediately. Rolling in your costs is particularly appropriate if you're planning to sell or refinance again in a few years because, in this case, it doesn't really matter that your loan amount is higher as long as you enjoy savings right now.
What is the difference between an Equity Line of Credit and another type of second mortgage? (back to top)
An Equity Line of Credit is money in an account that can be used as you need it. You can use any portion of it at any time and pay it back at any time. The interest rate is usually variable and is tied to the prime rate. Other types of second mortgages, such as the Home Equity Loan and 125 percent High LTV loans are simple interest products. You borrow a lump sum and pay it back over a period of years with interest. The interest rate for these products is fixed.
What are closing costs? (back to top)
Closing costs are sometimes also called settlement costs. These are the costs a lender charges for funding and completing your loan and are generally charged at the time of closing (or settlement). They often include discount points, which are fees paid to lower your interest rate. Settlement costs/closing costs vary greatly depending on your state, county, and/or metropolitan area. They also vary from one lender to another, so it pays to shop around.
What are prepaid interest and impound/escrow funds? (back to top)
Prepaid interest and impound/escrow funds are costs generally associated with a mortgage. At the time of closing your loan, a lender will often require you to provide the funds to establish your impound/escrow accounts (so your taxes and insurance can be paid on time) and to pay the interest for the time period between the loan closing date and the end of the closing month.
What are rates, terms, and APR? (back to top)
All mortgages have an interest rate, a term, and an annual percentage rate (APR). For example, a mortgage might be defined as a 30-year fixed-rate loan at 7.625 percent, with an APR of 7.800 percent. In this example, the mortgage term is 30 years. As the borrower, you will pay back the loan in installments over the course of 30 years.
The interest rate in this example is 7.625 percent. This means you must pay interest on the money you've borrowed at a rate of 7.625 percent per year. That is, in addition to paying back the loan, you will pay your lender an additional 7.625 percent of the current loan balance every year. This interest is basically the fee your lender charges you in return for lending you the money.
The annual percentage rate (APR) is a measure of the cost of credit, expressed as a yearly rate. Because APR includes points and other costs such as origination fees, it's usually higher than the advertised rate. The APR allows you to compare different mortgages based on actual annual costs.
What is "locking in a rate"? (back to top)
You can decide at any time to keep the current rate of interest. That is called "locking the rate." Typically there is no charge to lock your rate for 30 days. If you need a longer lock period, there may be additional fees depending upon the length of the lock.
What is a mortgage? (back to top)
A mortgage is a loan you acquire in order to purchase property, but you can also get cash for other purposes using the property as equity. In return for the loan, you pledge real property (land and/or a building) as security in case you fail to live up to your obligation.
When you borrow money against property, you commit to two financial documents:
- The NOTE that is a personal obligation to repay the loan on a timely basis
- The MORTGAGE DEED OF TRUST that is the pledge of the property as security; the mortgage deed of trust defines your obligations to your lender, as well as your rights and those of the lender.
You are pledged to repay the mortgage loan, along with an additional charge for the lender's service of lending you the money.
The cost of borrowing the money is the interest rate specified in your note. The amount of time you have to pay back the loan is the note's term.
What is amortization? (back to top)
Amortization means paying down your principal. You repay your loan in monthly installments. If you have a fixed mortgage (that is, an interest rate that remains fixed for the entire term of the loan), your payments will always be the same amount. Part of the payment goes toward the payment of the interest, and part toward the repayment of the money you've borrowed (the principal).
The balance of the principal (what you still owe at any given time) is reduced with each payment. As a result, your monthly payment will pay the principal in increasing amounts over time. With a fixed-interest rate, the amount of interest you owe will decrease as your principal balance decreases.
You can create an amortization schedule for fixed loans when they are originated. This schedule will show how much of each payment will go toward interest and how much will go toward principal over the life of the loan.
As your principal decreases, your equity in the mortgaged property increases. Equity is a very important factor in mortgage financing.
What is equity? (back to top)
Equity is a crucial aspect of home loans. Equity is simply the value of a homeowner's unencumbered interest on real estate. Equity is computed by subtracting the total of the unpaid mortgage balance and any outstanding liens or other debts against the property from the property's fair market value. A homeowner's equity increases as he or she pays off his or her mortgage or as the property appreciates in value. When a mortgage and all other debts against the property are paid in full, the homeowner has 100 percent equity in his or her property.
Equity exists in conjunction with your loan-to-value ratio (or LTV). Your LTV is a ratio expressing the value of your property to the amount of your loan. You determine your LTV by dividing your loan amount by your property's value or selling/purchase price, whichever is lower.
For example, you buy a $100,000 home with a $20,000 down payment of your own money, and cover the remaining $80,000 with a mortgage - 80,000 divided by 100,000 gives you a loan-to-value ratio of 80 percent and equity of 20 percent.
Equity and LTVs are important because lenders prefer a borrower to have as much equity as possible. Traditional wisdom holds that the higher the LTV on a loan, the higher the risk of default; alternatively, the higher the equity, the lower the risk - and therefore the lower the interest rate, cost, and fees associated with doing the loan. Equity also determines how much a lender will allow you to refinance your property for and how much they will lend you for a second mortgage.
Another way to think of equity is as the amount that you'll receive when you sell the property and pay back the remaining loan balance. Again, for a $100,000 house bought with an $80,000 loan and sold for $100,000, you would get $20,000 in cash back - or 20 percent of the home's value.
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