If you’ve decided to buy a house, congratulations! Homeownership is a rewarding experience and a great long-term investment. We’ve put together a list of terms you are likely to encounter — but may not yet be familiar with — during the homebuying process.
Escrow
This term refers to an account set up by the mortgage lender that’s used to hold part of the borrower’s money that pays for their homeowner’s insurance and property taxes. A portion of each monthly mortgage payment goes into escrow to cover these expenses.
APR
Standing for annual percentage rate, APR includes the interest rate, any paid points, and other fees the loan requires. It shows the true cost of the mortgage loan.
PITI Payments
PITI is short for “principal, interest, taxes and insurance” and is a combination of these four mortgage expenses. This is typically what a borrower will pay every month (although they may also pay private mortgage insurance).
Earnest Money
Buyers who decide to make an offer on a home will be required to offer up earnest money. This is a show of good faith to the seller that the buyer is serious about purchasing the property. Earnest money goes toward the down payment during the closing process. If the buyer doesn’t end up with the house, the title company returns the earnest money.
Private Mortgage Insurance (PMI)
Buyers who can’t pay 20% of the home cost down may need to purchase private mortgage insurance (PMI). This insurance protects the lender’s investment if the borrower stops making their payments. Once the mortgage loan decreases to under 80% of the home’s value, the borrower can refinance and “get out from under” PMI.
Amortization
Mortgage loans are typically set up over a 15- or 30-year time period, with the borrower making monthly payments until the debt is settled. The payment amount that goes to pay the principal and the interest changes throughout the life of the loan. This is called amortization. Buyers typically receive an amortization schedule with these calculations at closing.
Ratios
Lenders look at borrower’s financial information in a mathematical formula to measure their creditworthiness. Two ratios are especially important to understand:
- Loan-to-value (LTV) ratio
Lenders look at the amount of money they are lending compared to the value of the property. The bigger the buyer’s down payment, the better this ratio looks to the lender. - Debt-to-income (DTI) ratio
This ratio helps lenders decide if buyers can handle a mortgage loan. If they have too much debt compared to their income, they may not qualify for a mortgage.
Closing Costs
The buyer takes ownership of the property at closing. The closing costs are the expenses and fees tied to securing the home. These include the appraisal, the credit report fee, title fee and more. The buyer is usually responsible for the closing costs, although sellers sometime agree during the negotiation process to pay a portion of them.
