Glossary of TermsAnnual Percentage Rate (APR)The cost of a loan expressed as a yearly rate. The APR takes into account the interest rate, mortgage insurance, and loan origination fees (points). Appraisal A written analysis by a qualified appraiser to determine the value of a property. Closing Costs The expenses that are paid for a property transaction in addition to the actual price of the property. Normal closing costs include an origination fee, taxes, title insurance, and document prepartion fees. Credit Report A report of a borrower's credit history, prepared by a credit agency, which gives a complete history of payment records. Loan-to-Value Ratio (LTV) The ratio between the principal balance of a mortgage on a property and the appraised value (or sale price, if it is lower) of the property. Example: if a home is appraised at $100,000 and you are taking out an $85,000 mortgage, the LTV is 85%. Lock (Rate Lock) An agreement by your lender to guarantee a specified interest rate for a certain period of time. Mortgage Insurance A contract that protects the lender against loss resulting from the mortgagor's default on a mortgage. On most loans that have a Loan-to-Value ratio above 80%, the borrower is required to purchase mortgage insurance. Note A legally binding document that obligates a mortgagor (borrower) to repay a loan in a specified time period, based on a stated interest rate and other terms. Origination Fee A fee paid to a lender at closing, which covers the cost of procesing the loan application. Points A charge by the lender for originating a loan, which is expressed as a percentage of the loan amount. For example, 2 points of a $100,000 loan is $2000. Often you can pay extra points at closing to reduce the interest rate you are paying over the life of the loan. Principal, Interest, Taxes, and Insurance (PITI) The four costs that make up your monthly mortgage payment. Principal is the amount that goes toward paying down the actual balance of your loan. Interest is the amount that goes toward paying what you are being charged for holding the loan. Taxes are the monthly amount that you will need to allocate to pay your property taxes. Insurance is the amount that covers the mortgage and hazard insurance you are required to carry. Ratios (Qualifying Ratios) These are the percentages used by your lender to determine whether you qualify for a loan. The lender looks at two ratios: 1) your monthly income divided by your monthly housing expense; 2) your monthly income divided by your total debt obligations (this includes your mortgage payment as well as whatever other monthly expenses you have - car payments, credit cards, etc.). Title Insurance Insurance that protects both the lender and the buyer from any losses that occur as a result of legal disputes related to the ownership of the property. Underwriting The evaluation of a loan application to determine the creditworthiness of a lender and the value of a property. All loan applications go through an underwriting process to ensure that the loan will be a good investment for the lender.
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