For many buyers, the homebuying process can feel confusing. Mortgage jargon and lengthy acronyms can baffle even the most eager potential owners. The silver lining is that knowledge is power! This month, we’re walking you through some of the most common mortgage definitions that current and potential owners need to know.
So, let’s get to studying!
Adjustable-Rate Mortgage (ARM)
An ARM is a mortgage loan type with a changing interest rate. This means that the amount you pay on your mortgage can fluctuate over time, with changes reflecting the state of the interest market.
Annual Percentage Rate (APR)
Your APR is the annual effective rate of interest that you will pay back to the mortgage lender. It consists of your mortgage interest rate plus other costs, such as relevant origination fees, closing costs, rebates, and discount points. Generally speaking, lower APRs are more desirable and the APR on a loan will almost always be higher than the interest rate.
Consumer Financial Protection Bureau (CFPB)
The CFPB is a government agency that was created in 2010 to protect consumers by keeping lenders, mortgage companies, loan originators, and other financial service providers operating fairly.
Its’ primary duties include:
- Ensuring consumers have access to the information they need to make sound financial decisions.
- Enforcing and administering federal consumer financial protection laws and preventing unfair, deceptive, or abusive acts or practices against consumers.
- Monitor consumer behavior and financial markets for risks to consumers.
If you’re a current owner or plan on buying a home, the CFPB could be a great resource for you.
Closing Costs
One of the primary hidden costs of homeownership, closing costs can include lender fees, third-party charges, taxes and transfer fee. The buyer is responsible for paying these costs at closing, when the purchase of the property is finalized.
Conventional Mortgage (Conventional Loan)
Conventional Mortgages are loans not offered, guaranteed, insured, or secured by a government entity, as opposed to FHA loans or VA loans.
It’s important to note that recipients of conventional loans typically must pay for mortgage insurance if their down payment is less than 20%.
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio, or DTI, compares how much you owe each month for recurring debts to how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, car loans, student loans, or other recurring debt.
Higher percentages mean riskier investments for lenders, so you’ll want to keep your DTI in mind when applying for a mortgage loan.
It’s no secret that applying for a mortgage loan can be confusing. Luckily, with just a bit of studying, you’ll be up to speed in no time!
Published on April 4, 2022
