Mortgage Terms
Mortgage Terms and Definitions
The mortgage process can be a little confusing if you aren’t familiar with the terms used in the process. To help you out, here is a list of terms with corresponding mortgage definitions.
Broker: An independent mortgage professional that oversees the entire home loan process.
Lender: The business entity providing and funding the home loan.
Processor: Prepares your loan for underwriting. The processor makes certain your income is properly documented and verified, the appraisal is being performed, and title and escrow are opened.
Escrow: Works with title to certify payoff demands for all existing liens. Escrow is an independent group which disburses monies to all parties in the loan transaction and ensures full payment.
Underwriters: Make the decision to approve or deny the loan. Hired by the lender, their job is to review all aspects of the loan based on the lender’s approval guidelines.
Automated Underwriting: A computer generated loan approval. This automated process only takes minutes and is the quickest path to approval.
ARM: Adjustable Rate Mortgage. An ARM has a fixed rate for a specified amount of time. After the initial term, the loan becomes adjustable and the rate can fluctuate depending on market conditions. ARM payments are initially lower than fixed rate payments. This is an excellent option for people with damaged credit, those who plan to sell their homes short term or who simply want to save money on their monthly payment.
DTI: Debt to Income Ratio or your total monthly debt in relation to your gross monthly income. For example if you have 2,500 in total monthly debts with a total income of 5,000, your DTI is 50%. The higher the DTI, the higher the lender’s risk and 50% is typically the maximum allowable DTI.
Equity — The amount of vested or owned interest in your property. Subtract the total balance owed on the property from the appraised value to determine your equity.
FICO Scores: Most lenders use the FICO scoring system to qualify borrowers. The FICO score is a number assigned from each of the three main credit repositories (Experian, Trans-Union, and Equifax). This number is calculated based on your complete credit profile and takes into account late payments, balances on trade lines, inquiries for additional credit, judgments, bankruptcies, total debt, length of credit history, and more. The lower the FICO score, the higher the lender’s risk.
LTV: Loan to Value Ratio. For example: a loan amount of 75,000 on a home valued at 100,000 equals an LTV of 75%. Your equity would equal 25,000, or 25%. The higher the LTV ratio, the higher the lender’s risk.
Stated Income: Your own statement of income on the application versus income that can be independently verified. Use of stated income is an excellent option for self-employed individuals or those with hard to prove income.
Getting a mortgage for a home purchase can be stressful. If you understand the lingo being used, you will find it less so.
Mortgage Length Calculating Which Is Best
For many people, purchasing a home is one of the largest and most important investments they will make after their education. It is important to make sure you choose the right mortgage, one you will be able to pay off within a reasonable amount of time. You also want to make sure you choose a mortgage which has the right length of time.
The length of your mortgage should depend on your financial circumstances. It should also depend on your future goals. How much can you afford to pay each month on a mortgage while still maintaining a healthy amount of savings? Being able to save a reasonable amount of money each month will protect you in the event of an emergency. You will also want to save money for the education of your children and your retirement. These are things you will want to take into consideration when choosing the length of your mortgage.
Common Mortgage Terms
Most mortgages have a length of 15 or 30 years. While some companies do offer 20 year mortgages, the interest rates for 15 and 30 year mortgages are fixed. Because of this they are used more often than mortgages which last 20 years. If you choose to take a 15 year mortgage, your monthly payments will be much higher. This will mean that you will have less income available to save. A 30 year mortgage will give you lower monthly payments, and will allow you to save more money than you would save with a shorter mortgage.
Weighing Up Your Options
It is important to weigh the advantages and disadvantages of both options before making a decision. Long term loans will give your more disposable income to spend on whatever you wish. They are flexible, and will also allow you to invest money. You can pay more money on the mortgage when you have it available so that the total amount can be reduced. You are also given tax benefits by the government because you are paying interest for a long period of time. These loans are also the easiest to be approved for.
Getting A Cheaper Rate
At the same time, long term mortgages also have higher interest rates. Because you are paying a large amount on the interest, you will pay more money in the long term. It also takes a long time to build up equity in the home. Long term loans also require long term commitments. You will want to make sure you have stable employment.
How To Pay Less For Your Loan
Short term mortgages are able to be paid off much faster. They have much lower interest rates and equity can be built up very quickly. Because the interest rate is low you will pay less over the long term when compared to a long term mortgage. At the same time, your purchasing power will be low and you will not have many tax benefits. Short term mortgage loans are also hard to get approved for. These loans tend to have higher monthly payments.
Whether you decide to get a short term loan or a long term one, you will be able to refinance to change the length of the mortgage. If you decide a few years after setting up a 30 year mortgage that you earn enough to pay it off much faster, you can refinance the mortgage for a shorter length of time. If you have a short term loan and it is difficult to make the monthly payments, you can refinance it to a 30 year mortgage.
Choose the Best Deal
The most important thing is to sit down and figure out which option suits you best. You should look at your current income, how stable it is, and how much you will have left over after paying the mortgage every month. You should choose a home which evenly matches your level of income.