Skip to main content

Search form

Stumped by Mortgage Terms? We'll Keep You Out of the (Alphabet) Soup!

The mortgage business can be complicated. One way to simplify it – and make home buying less scary – is to understand the most common mortgage terms.  Learn the lingo before you start:

APR – The annual percentage rate (APR) is the yearly cost of credit, expressed as a percentage. The APR includes prepaid interest rate, discount points, and other charges that you are required to pay for the loan.  When shopping around, always compare the APRs – not the interest rates – between lenders. 

Escrow:  Escrows come in two forms.  One is the earnest money given to a seller before you buy and is held by the closing attorney. The second escrow is established by the lender when you purchase the home.  This escrow account includes the funds for your property taxes and homeowners insurance and is collected monthly as part of your mortgage payment.

GFE: The Good Faith Estimate is a formal written estimate of your expected closing costs.  By law, your lender must provide a GFE within three days of receiving your mortgage loan application. The costs at closing should not be higher than the GFE, with minor exceptions.

HUD-1:  Known also as the "settlement statement," this document itemizes all closing costs for the buyer and for the seller.  You should receive the HUD-1 at least 24 hours before closing. It includes real estate commissions, lender fees, amounts paid upfront for taxes and insurance, pre-paid interest and any miscellaneous items you paid, such as appraisal fees. The HUD-1 should closely match your original GFE.

LTV:  The loan-to-value ratio is the amount you borrow divided by the appraised value of your home. The percentage is important because the higher your LTV, the lower your home equity. Lenders generally require private mortgage insurance on mortgages with an LTV higher than 80%.

Private Mortgage Insurance (PMI):  This insurance is paid monthly on behalf of a private company or a federal government agency (such as the FHA) that protects the lender against financial loss if you don’t pay your mortgage.  Mortgage insurance is not required if your down payment is 20% or more.

PITI (Principal, Interest, Taxes, and Insurance): This is what you’ll actually pay your lender each month. This monthly payment can include mortgage insurance or homeowner association dues.

Unscrambling the mortgage alphabet will help you make a better informed decision about what may be the largest purchase of your life.