3 Common Terms Used With Mortgage Loans That You Might Not Understand
Posted on: 6 May 2017
If you have never applied for a mortgage loan before and are getting ready to, you might come across some terms you do not understand. There are many important terms used in the mortgage industry, and it is important to understand these before you shop for a mortgage. Understanding them may help you fully understand what they are talking about and what you are getting into before you sign the contract, and here are three important terms you should understand.
Loan-to-value ratio
Loan-to-value (LTV) is a ratio lenders almost always use when they are evaluating loan applications. This ratio is used to determine how much money to lend a person for a home loan. If you are approved for a loan, the bank may tell you that they will loan you a certain percentage of the sale's price of a house, and this percentage varies by loan type. For example, if you are approved for a conventional loan, the lender may tell you they will loan you 80% of the value of a house. You would then be responsible for coming up with the other 20% to use as the down payment.
Private mortgage insurance
Private mortgage insurance (PMI) is another term you might hear your lender talk about, and this is a very important one to understand. PMI is an extra expense you might be required to pay if you borrow more than the percentage the lender tells you. In the above example, you would be required to pay PMI if you borrowed over 80% of the value of a house.
PMI is designed to protect the lender, and it is something you will have to pay each month with your mortgage payment. The amount you must pay for this is typically between 0.5% to 1% of the value of the house. If the house you are buying costs $200,000, your annual PMI payments will be between $1,000 to $2,000, which would be an extra $83 to $166 per month.
Points
The other important term your lender might discuss with you is mortgage points. Mortgage points are often available for borrowers to purchase, and the purpose is to get a lower rate. Each point you buy will decrease the interest rate on your loan, and people purchase these to save money on their loans. Points must typically be paid in full when you obtain the loan.
If you are ready to take a big step in life by purchasing a house, it's important to understand how mortgage loans work and the common terms lenders use. If you have questions, contact a mortgage lender today. There are many sites online you can research for additional reading.
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