Taking out a mortgage for the first time can be confusing! If you’re not familiar with mortgage terms, it can seem like the loan officer is talking in a different language. At Frontier Bank, we want you to feel comfortable and prepared when handling your financials. Here are some mortgage glossary terms to help you on your mortgage journey!
- 3 day right of rescission: Any time a customer borrows funds against their primary residence excluding the initial purchase of the property, you are required by law to be given three business days to look over the papers and make a decision as to whether or not you want to cancel the transaction before midnight on the 3rd business day after the loan closing. For example, if you close on a Monday, you would have until midnight on Thursday to change your mind on the loan and let the lender know you wish to cancel.
- Note: The borrower is still responsible for any fees incurred in the transaction.
- Loan-to-Value (LTV): This is the amount that can be borrowed against a property. On a purchase it is figured using the purchase price and dividing it by the loan amount. On a refinance it would be based on the appraised value divided by the loan amount.
- Example: Borrowing $120,000 on a house you are purchasing at $150,000 would give you a LTV of $120,000/$150,000 = 80%.
- Private Mortgage Insurance (PMI): An insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. It is a monthly premium paid based on the Loan-to-Value above 80%.
- Cash to close: The amount of the cash to close can vary by the loan types. If purchasing, the most desirable would be 20% of the purchase price to avoid PMI, but most lenders have options of being able to finance more with less of a down payment.
- Loan Estimate (LE): Clearly explains all of the fees involved in the loan transaction in order to obtain the loan and gives you a proposal on terms of the loan.
- Closing Disclosure (CD): Documents all of the final fees involved in the loan process; borrower must receive this three business days BEFORE loan closing.
- Debt-to-Income Ratio (DTI): Figured using your gross monthly income and dividing it by all of your credit report debts (ie auto loans, credit cards, student loans, installment loans, house loan – current /proposed).
- Example: Fannie Mae and Freddie Mac use 45% as the optimal basis for this ratio. If you make $4000 gross a month, 45% of that would be $1800. $1800 must cover all of your debt payments, including the new loan.
- Escrow: A portion of your monthly loan payment that is set aside with the lender to pay the property taxes and/or insurance when they come due for the customer. This isn’t always required but there are some circumstances where it is.
For any other questions you may have regarding mortgages, visit our website page on mortgages or call your local branch.
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