For most people here in Las Vegas and Henderson, buying a home requires getting a mortgage. First time home buyers or even those who have purchased property in the past, can find this process to be rather daunting.
Mortgage lenders often sound like they speak a different language. Here, I define some commonly-used mortgage terms to help you navigate the mortgage maze here in Las Vegas.
Adjustable-Rate Mortgage (ARM)
The interest rate on your mortgage can go up or down. Rates are tied to an underlying market index, such as Treasury yields or the London Interbank Offered Rate (LIBOR). The interest rate and monthly payments fluctuate with the underlying index rate. Most ARMs come with an initial fixed-rate period, and only switch to an adjustable rate when the fixed period ends. They can offer a cheap solution for borrowers who plan on moving before the fixed rate is up.
Annual Percentage Rate (APR)
The overall cost of a mortgage, including the interest, points and fees. It assumes you will hold the mortgage for the whole term, so may not be a useful way to compare loans.
Closing Costs
Expenses incurred by buyers and sellers when transferring ownership of the home, including appraisal fees, title insurance, transfer taxes and recording fees.
Collateral
No matter which lender you go with or which type of mortgage you take out, your home is collateral for (secures) the loan. If you don't pay according to the terms of the contract, the lender can foreclose on your home.
Debt-to-Income Ratio
The amount you earn versus the amount you pay out to creditors each month, including your mortgage costs. Under new "ability to pay" mortgage criteria, a borrower’s debt-to-income ratio must be 43 percent or less.
Down Payment
The cash deposit you put down; as a minimum, between 3.5 and 20 percent of the purchase price. The more cash you put down, the better your chances of securing a decent interest rate.
Fixed Rate Mortgage
The mortgage interest rate -- and thus monthly payments -- stay the same for the life of the loan. You know exactly what you are paying each month. On the downside, when market rates fall, you may end up paying too much for your loan.
Good Faith Estimate
A statement of the APR and closing costs due on the loan, required by the Real Estate Settlement Procedures Act. Lenders must provide a GFE within three days of the borrower taking out a loan, and again at closing. Smart shoppers scrutinize GFEs from two or more lenders before committing to a loan.
Loan-to-value (LTV)
The size of the mortgage relative to the property’s value. The cheapest deals are usually available to homeowners borrowing 80 percent or less.
Origination Fee
Points charged to cover the lender's cost of making the loan.
Points
Additional money paid up-front to secure a lower interest rate on the loan. One point equals 1 percent of the loan amount. Borrowers typically pay anywhere from zero to 3 or 4 points.
Prequalified and Preapproved
Think of prequalification as a dry run. The lender reviews your income, assets and debts to arrive at an estimate of how much mortgage you can afford. Preapproval takes prequalification to the next level. The lender credit screens, contacts your employer and verifies your credentials. It then issues you with a letter saying that you qualify for a certain amount of mortgage for a certain time. Preapproved buyers are attractive to sellers, as the lender's already jumped through many of the underwriting hoops.
Principal
The amount of debt left on the loan, excluding interest, penalties and costs. This is the money that actually buys your house.