The homebuying process can be daunting. Between industry jargon and an array of acronyms, even the most determined homebuyer may find themselves scratching their head at one point or another.
The good news 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.
Refresh your memory with Mortgage Definitions You Need to Know: Part 1 and Part 2, and let’s continue studying!
Loan-to-Value (LTV) Ratio
Your loan-to-value ratio is exactly what it sounds like: a figure expressed as a percentage that illustrates the relationship between your loan amount and home value (Investopedia, 2022). You can calculate your current or potential LTV ratio by dividing the amount borrowed by the appraised value of the property. For example, if you were to buy a home appraised at $100,000 and make a $10,000 down payment, you would borrow $90,000 resulting in an LTV ratio of 90% (90,000/100,000).
Mortgage Loan
Of course, this term refers to a home loan, but it also technically includes the supporting documentation for financing the purchase of a property. Buyers will need to apply for a mortgage loan from a mortgage company, meet specific requirements, undergo an underwriting process and eventually close on a property, at which point they will begin paying down the mortgage loan (Investopedia, 2022).
There are multiple different types of mortgage loans (ARM versus fixed-rate, 15-year versus 30-year, conventional or non-conventional, etc.) that buyers can choose between.
Mortgage Broker
A mortgage broker is an independent loan originator who works on behalf of consumers to obtain mortgage financing. Mortgage brokers are not tied to particular banks and instead work with numerous lenders. Motto Mortgage offices are an example of a mortgage brokerage.
Origination Fee
The origination fee is composed of funds paid to the mortgage broker, loan originator or lender, possibly including an application fee, and fees for follow-up work and other associated costs with initiating the mortgage loan (Investopedia, 2022). It will typically be about 3% of the total loan amount.
Points
Mortgage points, often referred to simply as ‘points’, for short, are monetary payments a borrower can make to their lender in order to decrease their home loan interest rate (Bankrate, 2022). Each point is equal to 1% of the total loan amount, and typically lowers the interest rate by 0.25%. For example, purchasing one point on a $150,000 loan would cost $1,500 and drop an interest rate of 3% to 2.75%.
Pre-Qualification
Working with a loan originator, a prequalification helps determine how much of a mortgage loan you may be able to afford and what you could potentially be approved for depending on the mortgage professional providing the pre-qualification (Investopedia, 2022).
Principal
Your principal refers to the total amount of money borrowed for the mortgage loan and does not include interest.
Intimidating financial concepts and industry buzz words don’t have to derail your dreams of homeownership. After all, if you just continue researching and learning, you’ll be up to speed in no time!
Published on April 18, 2022
