Terms To Understand When Applying for a Mortgage

Applying for a mortgage can be overwhelming, especially if you are a first-time homebuyer. It’s not just about choosing the right lender or getting a preapproval letter; it’s also about understanding the complex terminology of the mortgage industry. Understanding the most common mortgage terms can make your home-buying journey smooth and stress-free. Let’s dive into some essential terms to understand when applying for a mortgage.

Down Payment

A down payment is an amount of money you pay upfront when buying a home. This payment is often a percentage of the home’s total purchase price, typically ranging from three to 20 percent. The larger your down payment, the less your monthly mortgage payment will be.

Interest Rate

The interest rate refers to the amount of interest that a borrower pays on a mortgage loan. It is expressed as a percentage of the total loan amount and can be fixed or adjustable. While a fixed-rate mortgage ensures your interest rate remains the same throughout the loan term, an adjustable-rate mortgage can fluctuate based on market conditions.

Escrow Account

An escrow account is a separate account where the lender holds the funds to pay for your property taxes and insurance premiums. Importantly, an escrow account is necessary if your down payment is less than 20 percent of the home’s purchase price.

PMI

PMI, or private mortgage insurance, is an additional insurance policy that lenders require on mortgages with a down payment of less than 20 percent. If you default on the loan, PMI protects the lender, and they will typically add it to your monthly mortgage payment.

Debt-to-Income Ratio

Your debt-to-income ratio, or DTI, is the ratio of your monthly debt payments to your gross monthly income. Most lenders prefer a DTI of 43 percent or lower, although some may allow a higher ratio in certain circumstances. A lower DTI indicates that you have a lower debt and can better afford your monthly mortgage payments.

Now that you understand the key terms to know when applying for a mortgage, you can begin the process confidently. If you’re looking for credit union services, contact Shell Western today. With this knowledge, you’ll be better equipped to navigate the complex terminology associated with the mortgage industry and make more informed decisions about your home purchase.