The California mortgage industry is infamous for throwing a lot of mortgage acronyms around. If borrowers aren’t familiar with the California mortgage industry or the lingo it can be confusing to understand what’s going on at times.
Here are seven of the most common California mortgage acronyms that every borrower should know when planning to take out a loan:
The APR is the Annual Percentage Rate. The APR is used by lenders to describe the full cost of a loan. APR’s include the loan’s interest, fees, points, and other costs a borrower might see during the process of taking out a loan. Since the APR considers all the other costs in addition to a loan’s interest, it is often higher than the loan’s actual rate.
We’ve blogged about ARMs, or Adjustable Rate Mortgages, several times. An ARM is a type of mortgage loan that has an interest rate that will adjust and fluctuate over the course of its life. ARM rates may go up or down depending on the Federal Reserve and the current market.
DTI is a borrower’s Debt-to-Income ratio. Lenders calculate and use a borrower’s DTI to determine how much a borrower spends on recurring expenses (home payments, student loans, car payments, etc.) and how much income a borrower earns each month. Most lenders in California recommend that borrowers stay within a 45% – 50% DTI limit.
This is the Federal Housing Administration. The FHA has home loan programs that are very popular for first-time borrowers. FHA loans allow borrows to make down payments as low as 3.5%. However, they also require insurance to protect lenders against borrower-default on loan payments.
The Loan-to-Value ratio (LTV) is the percentage of a buyer’s debt (their mortgage loan) to the appraised value of their home. LTV is calculated by dividing the mortgage amount by the total appraised value of the property.
For example, if a homeowner has a mortgage of $400,000 and the appraised value of their home is $500,000, then the LTV would be 80%.
PITI is a common term used within the mortgage industry to describe the four factors that impact a loan. PITI (pronounced “pity”) stands for Principal, Interest, Taxes, Insurance.
PMI, also known as Private Mortgage Insurance is an insurance cost that is required for loans with an LTV higher than 80% or a down payment of less than 20% of the purchase price. PMI helps borrowers who wouldn’t otherwise have the funds for a 20% down payment to still purchase a property.
If a borrower refinances, pays the loan down to an amount equal to 80% of the original purchase price, or provides proof that the home as appreciated to a point where the LTV is at 75% or less, they can stop making PMI payments.