Key Mortgage Terms Every Homebuyer Needs to Know

Applying for a mortgage can feel overwhelming, especially when you're faced with unfamiliar terms. To help you navigate the process with confidence, we've put together a list of key mortgage terms you’re likely to encounter, along with explanations of their significance and when you’ll see them.

1. Earnest Money Deposit (EMD)

Definition: A deposit made by the buyer to demonstrate their serious intent to purchase a property. This deposit is usually held in an escrow account until the closing of the sale.

Significance: The EMD shows the seller you are committed to the purchase. It is typically credited toward your down payment or closing costs. If the sale falls through due to the buyer’s fault, the seller may keep the EMD.

When You’ll See It: During the house-hunting phase when making an offer on a property.

2. Taxes and Insurance (T&I)

Definition: Payments collected by the lender for property taxes and homeowners insurance, often held in an escrow account to ensure timely payments.

Significance: These payments increase your total monthly mortgage payment.

When You’ll See It: On your monthly mortgage statement and during the closing process when your escrow account is set up.

3. Principal, Interest, Taxes, and Insurance (PITI)

Definition: The total monthly mortgage payment, which includes the principal loan amount, interest, property taxes, and homeowners insurance.

Significance: PITI gives you a complete picture of your total monthly mortgage obligation, which is essential for budgeting and loan discussions.

When You’ll See It: In monthly mortgage statements and when discussing loan terms with lenders.

4. Annual Percentage Rate (APR)

Definition: The annual cost of borrowing money, including interest and other fees.

Significance: A higher APR means a higher overall cost for the loan. Comparing APRs between lenders is crucial for finding the best loan terms.

When You’ll See It: During the loan application process and in loan estimates provided by lenders.

5. Debt to Income (DTI) Ratio

Definition: The percentage of your gross monthly income that goes toward paying debts, including your mortgage.

Significance: Lenders prefer a lower DTI because it indicates financial stability. A higher DTI may affect your chances of loan approval and could lead to less favorable loan terms.

When You’ll See It: During prequalification and loan approval processes.

6. Loan to Value (LTV) Ratio

Definition: The ratio of the loan amount to the appraised value of the property.

Significance: A higher LTV typically results in higher interest rates and may require you to purchase Private Mortgage Insurance (PMI). It can also impact loan approval.

When You’ll See It: During the loan application and property appraisal process.

7. Escrow

Definition: A financial arrangement where a third party holds funds until the conditions of a real estate transaction are met, such as property taxes and insurance premiums.

Significance: Escrow ensures these payments are made on time, protecting both the borrower and lender. It can also impact your closing costs and monthly payments.

When You’ll See It: Throughout the mortgage process, especially at closing and in your monthly mortgage statements.

8. Private Mortgage Insurance (PMI)

Definition: Insurance required by lenders when the borrower’s down payment is less than 20% of the home’s purchase price.

Significance: PMI increases your monthly mortgage payment and is typically required until you reach 20% equity in your home.

When You’ll See It: During loan approval and on your monthly mortgage statement.

9. Preapproval Letter

Definition: A document from a lender that verifies your financial information and conditionally approves you for a specific loan amount.

Significance: A preapproval letter signals to sellers that you are a serious buyer with financing in place, giving you a competitive edge in the homebuying process.

When You’ll See It: After you submit financial documents and undergo a credit check.

Navigating the mortgage process can be challenging, but understanding these key terms will help you make informed decisions and feel more confident throughout the journey. Use this guide as a reference to successfully manage your mortgage and homebuying experience from start to finish.

Ready to start your homebuying journey? Contact us today to learn more about our mortgage options and how we can help you secure the perfect loan for your new home.