Buying a house is an exciting proposition. You look for the right neighborhood, you think about the best layout for your family and you envision how you will put your own touch on your new home’s style. There’s a special joy to be found in planning for a new house, whether you are a first-time homebuyer, an experienced homeowner or even an intrepid soul looking to build your dream home. Every move feels like a fresh start, filled with promise and potential.
Of course, there may be challenges to overcome as well. One of the advantages of working with a bank that puts your needs first is that you can relax and stay focused on the more engaging parts of the home-buying process, while your lender concentrates on putting together the very best mortgage for your budget. Choosing your new home is much more enjoyable when a trustworthy banker has your back.
However, it’s still important to understand the basics of the mortgage process to ensure that there are no surprises when it comes to your home loan. Not only are there quite a few documents to sign when you close, the entire mortgage process has evolved to include its own set of shorthand – home lending-specific acronyms that might sound like a foreign language if you don’t hear them very often. With the right bank, you don’t have to worry about all of the details, but it’s still nice to know what everybody is talking about! Here are five of the most common mortgage-related acronyms and their meanings:
This stands for Adjustable Rate Mortgage. In general, this indicates a loan that has you pay a fixed interest rate for a certain amount of time, then “adjusts” based on several economic factors. That means the interest you pay may go up, and it may go down. These mortgages will normally be adjusted once or twice a year from then on, and depending on the terms of your loan, there can be limits on just how much your interest rate can rise or fall. The alternative to an ARM is an FRM, or Fixed Rate Mortgage.
Sometimes pronounced like the word “pity,” this is an acronym for Principal, Interest, Taxes and Insurance. It’s a way of saying “everything you will owe to own your home” rather than simply considering the mortgage payment. This can help you to more accurately determine what you will pay out each month, and as you make decisions about your budget, it can be a very important number to consider. When comparing financing options, make sure to compare apples to apples. Do both options include all of the PITI elements? Working with an experienced lender like those at First United Bank can make this easier. They can simplify and clarify your options.
A Debt-To-Income ratio is an important factor that banks use to determine how much you can borrow and how much you can afford to pay each month. In most cases, it is calculated by taking all of your monthly debt payments together and dividing that by your gross monthly income (income before taxes and other deductions). Nobody wants to commit to a mortgage that they can’t afford, and this formula helps lenders and borrowers to find a loan that fits.
These three letters stand for Private Mortgage Insurance. This policy is paid for by the borrower if they make a down payment of less than 20 percent on a home purchase (or if a homeowner doesn’t have 20 percent in equity for a refinance). It protects the lender in the event of a default, and its cost is often built into the mortgage’s monthly payment. Because PMI is based on a percentage of the loan amount, the larger the loan value, the more PMI will cost. Lenders like those at First United Bank understand all about PMI, and they make the process very easy to understand.
(5) LE / CD
LE stands for Loan Estimate. It is a three-page form that you get once you apply for a loan. It breaks down some of the important details of the proposed mortgage, including monthly payments and closing costs, as well as information about taxes and insurance. Near the end of the process you will receive a CD, or Closing Disclosure. This five-page document includes the loan terms, projected monthly payments, and information about fees and other costs. Comparing your CD with your LE is a fairly simple way to see if anything has changed during the process of preparing your mortgage.
If any of this sounds confusing, don’t worry. The most important part of a good mortgage isn’t learning about all of the jargon, it’s choosing the right bank. When you work with First United Bank, for example, your lender will work hard to make everything simple, freeing you up to think less about your mortgage and more about your new home. If you’d like to learn more, stop into your local First United Bank today and find out just how easy it can be to purchase the right home for you.