- Adjustable-Rate Mortgage (ARM):
A mortgage with an interest rate that can change periodically based on an index, resulting in varying monthly payments. - Amortization:
The process of paying off a loan through regular payments over time, where a portion of each payment goes toward the principal and a portion goes toward interest. - Annual Percentage Rate (APR):
A broader measure of the cost of borrowing money, expressed as an annual percentage. It includes the interest rate plus other charges or fees. - Appraisal:
An unbiased professional assessment of the value of a property, often required by lenders to ensure the property’s value supports the loan amount. - Closing Costs:
The fees and expenses associated with finalizing a mortgage, including appraisal fees, title insurance, and attorney fees. - Closing Disclosure (CD):
A five-page form that provides final details about the mortgage loan, including loan terms, projected monthly payments, and how much the borrower will pay in fees and other costs to get the mortgage. - Debt-to-Income Ratio (DTI):
A measure of a borrower’s monthly debt payments compared to their monthly gross income. Lenders use it to assess a borrower’s ability to manage monthly payments and repay debts. - Escrow:
An account held by the lender into which the borrower deposits funds to pay property taxes and homeowners insurance premiums. - Fixed-Rate Mortgage:
A mortgage with an interest rate that remains constant throughout the life of the loan, resulting in predictable monthly payments. - Loan Estimate (LE):
An estimate of the settlement charges and loan terms provided to the borrower by the lender within three days of applying for a loan. - Home Equity Line of Credit (HELOC):
A revolving line of credit secured by the equity in the borrower’s home, which can be used for various expenses such as home improvements, education, or other personal expenses. - Interest Rate:
The percentage charged by the lender for borrowing the principal, typically expressed as an annual percentage of the loan balance. - Loan-to-Value Ratio (LTV):
The ratio of the loan amount to the appraised value of the property, expressed as a percentage. It helps lenders assess the risk of the loan. - Origination Fee:
A fee charged by the lender for processing the loan application, typically a percentage of the loan amount. - Principal:
The amount of money borrowed or the remaining balance of the loan, excluding interest. - Private Mortgage Insurance (PMI):
Insurance required on conventional loans for borrowers who make a down payment of less than 20% of the home’s purchase price, protecting the lender in case of default. Government loans require Mortgage Insurance Premium (MIP). - Mortgage Insurance Premium (MIP):
Insurance required for some government-backed loans, such as those insured by the Federal Housing Administration (FHA). MIP protects the lender against losses if the borrower defaults on the loan.
- Rate Lock:
An agreement between the borrower and lender that allows the borrower to lock in the interest rate on the mortgage for a specified period, protecting against rate fluctuations during the application process. - Title Insurance:
Insurance that protects the lender or homeowner against any claims or legal fees that arise from disputes over the ownership of the property.
Pre-Qualification vs. Pre-Approval:
- Pre-Qualification:
A preliminary assessment by a lender of a borrower’s ability to qualify for a loan. It involves an informal evaluation of the borrower’s income, assets, and debts based on the information provided by the borrower. Pre-qualification is not a guarantee of loan approval and does not involve a detailed review of the borrower’s credit history. - Pre-Approval:
A more formal process in which the lender conducts a thorough evaluation of the borrower’s financial background and credit history. This involves a detailed review of the borrower’s income, assets, debts, and credit report. A pre-approval results in a conditional commitment from the lender to loan a specific amount, subject to certain conditions such as the appraisal of the property.
Comparison:
- Depth of Evaluation: Pre-qualification is based on self-reported information and provides a general estimate of loan eligibility. Pre-approval involves a comprehensive review of financial documents and credit history.
- Credit Check: Pre-qualification usually does not involve a credit check, while pre-approval includes a credit check and a detailed financial analysis.
- Commitment: Pre-qualification gives a rough idea of what a borrower might qualify for, but it is not binding. Pre-approval is a more concrete step that provides a conditional commitment from the lender.
- Usefulness: Pre-qualification can help borrowers understand their potential loan options early in the process. Pre-approval is more valuable when making offers on homes, as it shows sellers that the borrower is serious and has the financial backing to complete the purchase.
