Mortgage Basics
Key terms in plain English.
APR
Annual Percentage Rate. The interest rate plus certain loan costs expressed as a yearly rate to help compare loan offers.
PMI
Private Mortgage Insurance. Typically required on conventional loans when the down payment is less than 20%; protects the lender if the loan defaults.
LTV
Loan-to-Value. The loan amount divided by the appraised value of the home, expressed as a percentage.
DTI
Debt-to-Income. Monthly debt payments divided by gross monthly income; lenders use this to evaluate qualifying.
Escrow
An account managed by the loan servicer that holds funds for property taxes and insurance to be paid on the borrower's behalf.
Amortization
The process of paying down a loan over time through scheduled payments of principal and interest.
Points
Optional upfront fees paid at closing to lower the interest rate over the life of the loan.
Fixed vs ARM
Fixed-rate loans keep the same interest rate for the life of the loan. ARMs have an introductory fixed period followed by periodic adjustments.
Down Payment
The portion of the home price the buyer pays upfront, typically as a percentage of the purchase price.
Pre-qualification vs Pre-approval
Pre-qualification is an initial review of your stated information. A formal credit decision requires a full application and underwriting.
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