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While there is no need for you to be a mortgage expert, having a basic understanding of certain key concepts will help your communication with a mortgage lender. Below is a summary for your reference. All this to get you closer to your goal of homeownership.
Annual Percentage Rate (APR):
The APR includes the base interest rate, points, and other loan fees. It is a great way to compare the cost of loans from different lenders because the calculation of the APR is standardized.
Title search, origination fees, discount points, prepaid of taxes and insurance, and real estate transfer taxes, which are fees paid outside of the actual loan, make up closing costs.
A point is 1% of the home loan. Borrowers can pay points at closing as a way to buy down the overall interest rate and mortgage payment.
Loan-To-Value (LTV) Ratio:
A mortgage lender divides the amount of the loan by the asking price of the home to come up with a percentage. A high LTV, such as 90%, means the borrower only has to contribute a small down payment (in this case 10%), while a lower LTV, such as 70%, requires more cash to put down, but may negate the need for private mortgage insurance.
This protects the lender in the event of a default. When buyers take out a mortgage down payment of less than 20%, they must pay mortgage insurance, a monthly premium that is added to the mortgage. This protects the lender should a buyer default on the home loan.
Principal, Interest, Taxes, and Insurance (PITI):
These are four elements that make up a monthly mortgage payment. Payments of principal and interest go toward repaying the loan, while the payment for taxes and insurance usually goes into an escrow account to cover those fees when they are due.
Some costs, such as taxes, insurance, assessments, and interest, are paid before the first monthly mortgage payment is due.
A formula is used to determine the loan amount borrowers may qualify for based on the ratios of income to expenses, partially determined by the percentage of the borrower’s income that goes to pay bills.
When a lender locks in a rate, it constitutes a guarantee that the interest rate will not change for a set period of time while the purchase of a home is finalized. Rate locks will expire if closing takes longer than anticipated, but they can be extended, generally for an additional fee.
An underwriter analyzes all the documents related to a loan and all the information the borrower has provided to determine if the loan is a good risk.
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