10 Terms You Should Know But Were Probably Too Bored to Ask
All right, we get it. Banking isn’t the most interesting topic in the world. It is, however, one that’s important for you to understand if you want to reach your goals in life. Say, for example, you want to buy a home. You’ll need to understand some of those confusing terms lenders tend to throw around.
Here are 10 terms you should know, but were probably too bored to ask:
- Amortization. That’s a fancy word for paying off a mortgage over time by making regular payments of principal and interest.
- APR. In addition to being a handy abbreviation for the month of April, APR is an acronym that stands for Annual Percentage Rate. Unlike an interest rate, which just reflects the cost of borrowing the principal on your mortgage, the APR reflects other costs, such as interest, certain closing costs, and points. It is the true cost of borrowing. It is the true cost of borrowing.
- ARM. In addition to being an important part of your body, an ARM is another acronym (shocker!) that stands for adjustable-rate mortgage. With an ARM, your interest rate may change periodically, so your monthly payments may be higher or lower, depending on the interest rate environment. An adjustable-rate mortgage differs from a fixed-rate mortgage, where (you guessed it), your interest rate stays the same for the entire mortgage period.
- Closing. Often referred to as settlement, the closing is the legal process whereby all parties involved in the sale will review and sign the appropriate documentation. It is the final step of the mortgage process and one that may cause your wrist to ache from signing your name so many times.
- Closing costs. Getting a mortgage is not all glamour; there are also some costs involved. These costs may include points (see below), appraisal fee, credit report, title insurance, taxes, and more. By law, your lender must provide a list of these fees to you.
- LTV. Another common acronym used is LTV, which is definitely not as fun as an ATV (all-terrain vehicle). LTV stands for loan-to-value, which is the ratio of the amount of the mortgage over the lower of the appraised value or purchase price of the home. Depending on the type of loan, lenders require that you have a certain LTV to qualify for the mortgage.
- PITI. Those who have mortgages know that it’s a pity to have to pay back the money you borrow. This type of PITI is yet another acronym that stands for principal, interest, taxes and insurance, which may make up the total amount of your mortgage payment each month.
- Points. If you’ve spent any time looking at mortgage rates, you may be wondering, “What’s the point of a point?” Often referred to as discount points, points are the fees you pay a lender to get a reduced interest rate. One point is equal to one percent of the mortgage amount. So if you are borrowing $200,000, paying one point would be $2,000. If you wanted to pay two points for an even lower rate, it would cost you $4,000. The more points you pay, the lower your interest rate. That’s the whole point, silly.
- Principal. This type of principal is not the scary man or woman who used to dish out detentions in your grammar school. In the mortgage world, it refers to the amount of your mortgage, the total amount of money you borrow at the closing.
- Term. The term of your loan is the length of time your mortgage will be in effect. So on a 30-year mortgage, the term is 30 years.