What Does It All Mean?

If you are in the process of applying for a mortgage or are already going through the approval process, chances are you have heard lots of "mortgage lingo" that you don't understand. Knowing as much as you can about mortgages and understanding what all the lingo means will make the process much more enjoyable and ensure that you feel confident that you made the right decisions along the way. Below are some terms that you should know:

• A lock in guarantees a certain interest rate for a certain period of time.
• Underwriting is the process of evaluating a loan to determine whether the loan is a good risk.
• Prepaid interest is usually paid at loan closing. It is the interest paid on a new loan from the day of closing through the end of the month. All future interest on a mortgage loan is then paid in arrears.
• A gift letter is when someone gives you money for a down payment as a gift. That person must write you a gift letter so that it can be included in your loan documentation.
• PITI is the total monthly payment you make on a house - Principal, Interest, Taxes, and Insurance.
• The origination fee is the fee some lenders charge to cover some of the costs of making the loan and is calculated by multiplying the total mortgage loan amount by the percentage shown. The fee is typically 1% or lower.
• The Annual Percentage Rate (APR) shows the rate which will be charged on the note signed at closing, including the total cost to obtain the loan. This includes the total interest paid over the life of the loan, plus certain closing costs. All of these "finance charges" are taken into consideration when calculating the APR to give a more accurate picture of the total cost of the loan.
• Discount points are fees paid to a lender at closing in order to lower the interest rate on your home loan. One point equals one percent of the loan amount. Your own personal financial goals need to be taken in to consideration when deciding whether or not to purchase points and, if so, how many points to purchase.
• An escrow account is an account in which the lender deposits the taxes and insurance premiums that are a part of your monthly mortgage payment. When borrowers make their monthly mortgage payments, they generally also pay one-twelfth of the anticipated annual amount needed for taxes and insurance premiums. The lender pays the taxes and insurance premiums as they become due from the escrow account. It is typical for lenders to require that an escrow account be established.

Becoming familiar with and understanding "mortgage lingo" will help you become more confident when going through the loan approval process.