Understanding Key Mortgage Terms

Buying a home is one of the biggest life events most of us will experience. It’s not only a huge milestone and an exciting prospect, it can also be scary and sometimes overwhelming. When applying for a mortgage, you’ll see a lot of terms that can quickly get confusing. Understanding these terms will take away some of that terrifying sense of not knowing what’s going on during the process and help give you some confidence in dealing with your mortgage. In this article, we’ll dive into some key mortgage terms, what they mean, their significance, and when a homebuyer will see them.

Earnest Money Deposit (EMD)

• Definition: A deposit made by the buyer to show serious intent in purchasing a property, typically held in an escrow account until closing.
• Effect: An EMD can affect closing costs as this deposit is usually credited toward the buyer’s down payment or closing costs. If the deal falls through due to the buyer’s fault, the seller may keep the EMD.
• When seen: Typically, during the house hunting phase, when making an offer.

Taxes and Insurance (T&I)

• Definition: Payments collected by the lender for property taxes and homeowners’ insurance, often held in an escrow account.
• Effect: T&I can increase the monthly mortgage payment.
• When seen: On the monthly mortgage statement and during closing as part of escrow setup.

Principal, Interest, Taxes and Insurance (PITI)

• Definition: The total monthly mortgage payment, including the principal, interest, property taxes, and homeowners’ insurance.
• Effect: This gives the full picture of the borrower’s monthly payment obligations.
• When seen: On monthly mortgage statements and during loan discussions with lenders.

Annual Percentage Rate (APR)

• Definition: The true annual cost of borrowing, including interest and any additional fees or costs.
• Effect: A higher APR means a higher cost of borrowing.
• When seen: During the loan application process and in loan estimates provided by lenders.

Debt to Income (DTI) ratio

• Definition: The percentage of a borrower’s gross monthly income that goes toward paying debts.
• Effect: A higher DTI can affect loan approval chances and loan terms. Lenders typically prefer a lower DTI.
• When seen: During the loan prequalification and approval processes.

Loan to Value (LTV) ratio

• Definition: The ratio of the loan amount to the appraised value of the property.
• Effect: A higher LTV can result in higher interest rates and the need for PMI. It also influences loan approval.
• When seen: During the loan application process and property appraisal.

Escrow

• Definition: Where funds are held by a third party to ensure that conditions in a real estate transaction are met.
• Effect: It ensures that property taxes and insurance premiums are paid on time. Escrow can affect closing costs and monthly payments.
• When seen: Throughout the mortgage process, particularly at closing and in monthly statements.

Private Mortgage Insurance (PMI)

• Definition: Insurance required by lenders if the down payment is less than 20% of the home’s purchase price.
• Effect: It increases the monthly mortgage payment until the borrower reaches 20% equity.
• When seen: During loan approval and on monthly mortgage statements.

Preapproval letter

• Definition: A more detailed evaluation where the lender verifies your financial information and conditionally approves you for a specific loan amount.
• Effect: It indicates to sellers that you are a serious buyer with financing lined up.
• When seen: After submitting financial documents and undergoing credit checks.

Don’t let one of your biggest life milestones get overshadowed by doubt, confusion, and fear! Use our guide to learn the terms you need to know to successfully navigate the homebuying process and your mortgage payments for years to come. Then go out there and get your dream home with confidence!