If you’re looking to buy a home or want to refinance the one you’ve got, chances are there are a lot of financial terms and mortgage lingo being thrown at you that you may or may not understand. Your home is the biggest purchase you will ever make, so before you sign on the dotted line, make sure you understand everything. Below is a list of definitions to popular mortgage terms. If you don’t understand something your mortgage broker is telling you, be sure to ask. When it comes to mortgages, the only silly questions are the ones you don’t ask.
Debt-to-Income-Ratio (DTI). This is the comparison of your gross monthly income (what you earn before taxes) to your monthly debts. So, for example, if you make $3000 a month before taxes and your monthly debts amount to $1100, your DTI is then 36.6% (divide $1100 by $3000).
Typically, your DTI should be no greater than 40%, including your new mortgage payment, to qualify for the lowest interest rates.
Fixed, or fully amortized, mortgage. A fixed mortgage, like a 15 or 30 year fixed, is one that has an interest rate that never changes over the life of the loan. With a fixed mortgage your monthly payment goes toward both the principal and the interest of the loan. As you pay down the balance of your loan, the payment stays the same.
Liquid assets Liquid assets are any type of assets you can access immediately, including checking, savings and money market accounts, IRA, 401k, CDs, bonds, stocks and mutual funds, to name a few. A common misconception is that equity in your home is an asset, but unfortunately it is not. (If there was an emergency and you needed $6,000 tomorrow, you may not be able to draw that money against your home’s value so it is therefore not a liquid asset.)
Equity Equity is the amount of money your home is worth, above and beyond your mortgage. So, if you have a mortgage of $150,000 and your home is valued at $200,000, you then have $50,000 equity in your home.
Loan-to-Value (LTV) Loan to value is the percentage of money you are borrowing against the value of your home. Let’s say you are buying a home that costs $200,000. You have $40,000 to put towards a down payment and will only need a loan for $160,000. Your loan to value is then 80% ($160,000 / $200,000).
Credit history Your credit history shows what your payment history is like on other bills you carry. Have you always paid your bills on time or have you been 30, 60 or even 90 days late paying your credit card, car payment or any other debt? If so, it will appear on your credit report and decrease your chances of qualifying for a mortgage. No bank will lend money to people who can’t pay their current debts, especially in this economy, so be sure to always pay on time.
Interest only Interest only, or “simple interest”, payments are calculated by multiplying your interest rate by your loan amount and then dividing by 12. An interest only payment goes entirely to interest and not a penny to the principal balance. Interest only loans are now really only available on home equity lines of credit.
Earnest money deposit An earnest money deposit is a check that a buyer gives to the seller, in good faith that he or she will buy the house. The earnest money deposit is given when the purchase contract is solidified and is held in escrow by the attorney until closing.
