Many first-time homebuyers may be confused by the various mortgage acronyms used in the homebuying process.
To get you started, we’ve compiled seven of the most common mortgage acronyms that a borrower in Texas may encounter when buying or refinancing a home:
1. APR
APR stands for Annual Percentage Rate. The APR is used by lenders to describe the full cost of a loan, expressed as a yearly rate. APR’s include the loan’s interest, fees, points, and other costs a borrower might see during the process of obtaining 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.
2. ARM
We’ve blogged about ARM’s, or Adjustable Rate Mortgages, several times. An ARM is a type of mortgage loan that has an interest rate that adjusts and fluctuates over the course of its life. ARM rates may go up or down depending on the current market.
3. DTI
DTI stands for Debt-to-Income ratio. Lenders calculate and use a DTI ratio to determine how much a borrower spends on recurring monthly expenses (home payments, student loans, car payments, etc.) compared to how much income a borrower earns each month. Most lenders in Texas recommend that borrowers stay below a 49% DTI ratio for a conforming loan.
This blog goes into more detail about the DTI requirements Texas buyers need to meet when purchasing a home.
4. FHA
The FHA is the Federal Housing Administration. The FHA has home loan programs that are very popular for first-time homebuyers. These loans allow borrowers to make down payments as low as 3.5%. However, they also require an upfront mortgage insurance in addition to the loan’s monthly payment to insure the loan.
5. LTV
The Loan-to-Value ratio (LTV) is the percentage of a borrower’s debt (their mortgage loan) to the appraised value or purchase price of the home. LTV is calculated by dividing the outstanding mortgage balance by the lower of the appraised value of purchase price.
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%.
6. PITI
PITI is a common term used within the mortgage industry to describe the four factors that impact a loan. PITI stands for the Principal, Interest, Taxes, and Insurance.
7. PMI
PMI, also known as Private Mortgage Insurance, is an insurance cost that is required for conventional loans with an LTV higher than 80% (i.e. a down payment of less than 20% of the purchase price). PMI protects the lenders in the event of loan default. The word “Private” in PMI distinguishes it from just “Mortgage Insurance” or the “MI” that is required for FHA/ government loans.
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 have the PMI removed.
If have questions about any of the mortgage acronyms discussed above, or have additional questions about home buying or refinancing in Texas, you can reach us here, by phone at (855) 855-4491, or by email at [email protected].
