Mortgage Acronyms 101

Mortgage Acronyms 101

Jan2015-Trulia-Real-Estate-Acronyms-SS-172505192-1000x667Guiding you through all the jargon and giving it to you straight, no chaser. 

Learn the lingo! Knowing what the acronyms mean will make the experience less frustrating.

It’s easy to recover from that awkward social moment when you thought “LOL” meant “lots of love” instead of “laughing out loud.” But confusing your mortgage acronyms? That can cost you money.

Mortgage professionals are a key part of shopping for a new home, but the problem is, sometimes they use so many acronyms that it sounds like they’re speaking a foreign language.

“These acronyms have turned into words themselves and have become commonplace across the industry,” says Eric Gotsch, area sales manager at Wells Fargo Home Mortgage.

Knowing what all those acronyms mean will only help you understand what everyone’s talking about and make the experience less frustrating. Since a home is likely the most expensive thing you’ll ever buy, doing your homework will help you navigate through the process and avoid costly mistakes.

“You need to take time to understand these [acronyms] so you understand what your loan will cost,” says Cara Ameer, broker associate at Coldwell Banker Vanguard Realty, based in Ponte Vedra Beach, FL.

Here’s a list of mortgage acronyms that professionals recommend you learn:

ARM (Adjustable Rate Mortgage): It isn’t a body appendage. While fixed-rate mortgages have the same interest rate and monthly payment for the life of the loan, the interest rate and monthly payments on an ARM change. ARM interest rates are typically fixed for a period between three and 10 years before starting to adjust. The new payment is calculated using a rate based on an underlying index like LIBOR (not an acronym you need to know, but it stands for “London Interbank Offered Rate”) or the Constant Maturity Treasury (CMT), for example, plus a margin. Understanding how your rate can change and how this can increase your payment is very important.

DTI (Debt-to-Income): This ratio is the percent of your income that goes toward paying monthly bills. Lenders typically require DTIs below a specified percent for you to qualify for certain loan products.

GFE (Good Faith Estimate): This is a federally required document that includes the lender’s name and address; loan terms like loan type, amount, and interest rate; sales price; and an estimate of the various settlement charges and fees, including the appraisal fee, credit report fee, lender fees, inspection fees, title and escrow fees, settlement fees, and any loan-origination fees. The final GFE should match the HUD-1 statement, which also lists the loan terms.

HELOC (Home Equity Line of Credit): It works like a credit card, except you draw against the equity in your home.

IO (Interest Only): These are monthly payments of just interest, sort of like what you owe someone. Certain mortgages allow for these lower payments for a specified period. These loans work best for consumers who expect a significant bump in income or plan to refinance or move prior to the end of the interest-only term.

LOX (Letter of Explanation): Not to be confused with smoked salmon, typically eaten with cream cheese and bagels. These are short letters provided to a lender that can help you qualify for your mortgage by explaining why your income has changed, your rental history, or any late payments, for example.

LTV (Loan-to-Value): This ratio is calculated by dividing the loan amount by the home’s purchase price. When people put 20% down, their LTV is 80%, and lenders have special programs for borrowers who put down less than 20%.

MIP (Mortgage Insurance Premium): Not a sound a robot makes, but rather a fee that’s financed as part of the loan and charged by the government for Federal Housing Administration (FHA) loans. This special program allows first-time buyers to put down less than 20% on their purchase.

P&I (Principal and Interest): These payments are the amount due every month on your mortgage.

PITI (Principal, Interest, Taxes, and Insurance): Not a sad party, but rather your total monthly housing expense, which includes the P&I payment due on your mortgage, and the taxes and insurance on your house.

PMI (Private Mortgage Insurance): An extra fee you pay when your down payment is less than 20%.

POC (Paid Outside of Closing): Fees that are paid upfront with your loan application, like appraisal or inspection fees.

QMs (Qualified Mortgages): Must meet certain requirements specified by the Dodd-Frank Wall Street Reform and Consumer Protection Act, such as loan amount, interest rate, and underwriting, so they can be purchased by a government-sponsored entity (GSE).

RESPA (the Real Estate Settlement Procedures Act): More like a map than a Vespa scooter since it requires that you receive certain disclosures about closing costs and settlement procedures, such as the GFE, at certain times during the mortgage process.

TIL (Truth in Lending): Statements issued with the GFE and which provide detail on the loan terms in a standard format, to include the interest rate, number of payments, late charges, and prepayment penalties.

VOE (Verification of Employment): Proof of your income with W-2s, pay stubs, or income tax returns.

WDO (Wood-Destroying Organism): Termites. Enough said.

Although this list is long, if you don’t remember what these terms mean, clarify with your mortgage professional. Says Wells Fargo’s Eric Gotsch: “Asking will never be a stupid question, especially during something as important as the homebuying process.”

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Originally posted at by: Andrea Murad

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Phone: 956-587-1633
Dated: March 4th 2015
Views: 1,053
About Marilyn: Always ahead of the highly competitive RGV real estate market, Marilyn Cortez is a Spanish speaking ...

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