Getting A Mortgage? Understand What The Following Jargon Means
There are a lot of terms used by mortgage lenders to describe their product, many of which are used for the first time with new home buyers. If you don't want your loan officer to feel like they are speaking a second language, it will help to know what the following jargon actually means.
Amortization
Amortization is used to describe how a loan is gradually paid off over a period of time with regular installment payments. Each payment is broken down into a percentage of principal and interest, with the initial payments having a large percentage of interest. As you continue to pay off the loan, the percentage of each interest payment will go down, and about halfway through, the payment will start being made up of more principal. Near the end of the loan, almost all of the payment goes toward the principal.
APR
APR stands for your annual percentage rate, which is the amount of money you pay in interest and fees for borrowing money. The APR is an actual way to compare rates between lenders. This is because some lenders may have a lower interest rate, but charge more in fees and result in a higher APR. The APR covers everything, so you will know exactly what you are paying each month and can make an apples-to-apples comparison.
Escrow
Some lenders will require that you use an escrow account to pay your home insurance, property taxes, and other expenses associated with your loan. However, others will let you handle paying for those items on your own and not require an escrow account. Anyone that has an escrow account will need to fund it in advance of the bill's due date, and the bill is paid from the funds within the account. It's a way to ensure that the money is in reserve to make those big payments, which helps protect you and the lender.
LTV
The loan-to-value ratio represents a percentage that compares the home's appraised value to the loan value. A high LTV can make the loan feel like more of a risk, and a low value shows that the loan would be safe to approve. An LTV percentage can become lower when the borrower provides a bigger down payment, when the home is appraised at a higher value than the purchase price, or a combination of both. A low LTV can result in favorable loan terms as well, such as a lower interest rate and not requiring private mortgage insurance to be purchased.
Reach out to a local service, such as University Federal Credit Union, to learn more.
