What Is PITI?
This stands for principal, interest, taxes and insurance. It reflects what your total monthly payment will be on your mortgage.
What Is the Difference Between APR and Interest Rate?
The interest rate is what you are paying on the unpaid balance of the loan. The APR includes the interest rate AND any finance charges, such as points, PMI, underwriting, processing and origination fees. Your interest rate is the rate at which you make a payment each month, but the APR is more of a universal measuring stick that can help you to compare different loans from various lenders.
What Are Closing Costs?
Closing costs are what you must pay to close and fund the loan. They will usually include fees for appraisals, title insurance, attorney fees, pre-paid fees and more. These items will often differ substantially from loan to loan, depending upon the amount and type of loan. It is common to pay between 3-5% in closing costs for the loan. You may be able to wrap some of the closing costs into the loan, or even have the seller pay part of them.
What Is PMI?
PMI stands for private mortgage insurance. It is offered by an insurance company to protect the lender if the borrower does not pay the mortgage. PMI is usually required for loans that have less than 80% loan to value. This means if you put down less than 20% for the loan, PMI is probably required. The cost of PMI is normally added to your monthly payment. This insurance is required for both conventional loans and loans backed by the VA and FHA. Once you reach 20% equity, you should be able to cancel conventional mortgage insurance, but FHA financing often require mortgage insurance for longer.
Can I Lock in My Interest Rate?
Yes, once you are getting closer to a closing date and want to lock your interest rate, your lender can do this for you. Rates can typically be locked for 30 or 60 days. You may have to pay for a rate to be locked for 60 days or longer.
What Are Points?
Points are a loan origination fee that may be charged by the lender to get your rate lower. One-point equals one percent of the loan amount. So, if you pay 1 point on a $200,000 loan to get a lower rate, you are paying $2000. It is common for points to be added to the loan balance.
How Does Escrow Work?
The escrow account is a separate financial account that holds the funds for paying property taxes and homeowner’s insurance. Each month as you pay your mortgage, the lender collects the funds that are collected into this account. The homeowner’s insurance and property tax bills are paid by the lender as they become due. Escrow makes it easier to keep on top of bills that must be paid along with the mortgage. Many lenders require escrow accounts and will not allow you to pay for homeowner’s insurance and property taxes on your own.
What Is a Jumbo Mortgage?
This is a conventional loan that exceeds the amount that government agencies will insure against default. If you want to get a jumbo mortgage, you may need to have more assets, a higher credit score, and larger down payment. Underwriting for jumbo mortgages is more extensive because the loan is not guaranteed against default by the government. The current limit for most parts of the country for a conforming loan is $424,100. Anything above this is a jumbo mortgage. Expect to need a credit score of 700 or higher and at least six months of mortgage payments in your bank account.
Can I Pay Off My Loan Early?
In most cases, yes. You should only look for a mortgage with no pre-payment penalties. If you come across some cash and can pay off the loan early, this is usually desirable because you are able to save thousands in interest.
What Is an Conventional Loan?
This is a fixed rate loan that is secured by the mortgage on the property and it is not guaranteed by FHA or VA. Conventional loans have more rigorous underwriting because they are not backed by a government agency. You need to usually have a minimum FICO score of 620, and a loan that does not exceed $424,000, as well as a debt to income not above 36%.
What Is an FHA Mortgage?
This is a loan insured by the Federal Housing Administration. If you default, the FHA will pay back the lender part of the loan principal with your mortgage insurance that you have paid for during the loan term. These government loans are easier to qualify for and may require as low as a 3.5% down payment and 580 credit score.