Whether you already have a mortgage, or are planning on purchasing a home, there are a lot of industry related terms that get thrown around rather casually. Here’s a handy guide for navigating through some of the lesser known terms.
Amortization
This simply refers to the schedule of how the loan is going to be repaid. For instance, you have both 15 year and 30 year fixed rate conventional loans. In the case of each of these, the amortization schedule would be the monthly payment for a 15 year, and 30 year respectively, including interest rates.
Closing Costs
These are costs associated with closing the loan which can include, but is not limited to: fees for a credit report, loan origination fees, and underwriting fees among others.
Mortgage Escrow
An escrow is the payment that is collected by the lender each month, along with the regularly scheduled mortgage payment, to pay for real estate taxes and hazard insurance premium. While mortgaged homeowners can choose to make these payments themselves, they often benefit from mortgage rate discounts by simply passing them on through the lender, who then holds the funds for payment to the homeowner’s county assessor and insurance company when the payments are due.
To find your home escrow payments, simply find your latest home real estate tax-bill, add in the annual insurance premium, and divide it by 12 (the number of months in a year) This is your monthly escrow payment.
PITI
This is an acronym which stands for Principal, Interest, Taxes, Insurance and represents the total housing payment made in that month. It is calculated by simply adding all of them together.
PMI (Private Mortgage Insurance)
When the loan to value ratio (LTV) is above 80% lenders will generally require private mortgage insurance (PMI) to guarantee the loan against default. Borrowers pay a monthly premium until the loan to value ratio (LTV) drops below 80%. In the case of FHA loans, the only way to get rid of PMI is to refinance into a conventional loan once the LTV is below 80%. Another popular option for conventional loans, to avoid having to pay the monthly mortgage insurance, is to take on a 2nd mortgage.
Points
Percentage points of the loan amount. As an option to borrowers, lenders can allow the borrower to “buy down” the interest rate by paying portions of the loan up front, saving the borrower money over the long term in the form of lower interest rates.
Title Insurance
Insurance paid by borrowers that ensure the property is free and clear of any liens against it, so that the property may be used as collateral in the event of a default on payment.
This is just a small list of terms that many individuals will often face when refinancing. For more information on terms like LTV, check out our video.
