Glossary

28/36 rule

This rule, used by lenders when determining who to extend credit to, helps calculate the amount of debt a household can safely take on. According to the rule, your household shouldn’t spend more than 28% of its gross monthly income on total housing expenses and no more than 36% on all other debts, including expenses like car payments, student loans, and credit card payments.

Adjustable Rate Mortgage

Rate is fixed for the first 5, 7 or 10 years (depending on your term) and may adjust every 12 months based on current market rates after that. You'll likely have a lower interest rate and APR for the initial period of an adjustable rate loan than you would with a fixed rate loan.

Annual percentage rate (APR)

This is the measure of the cost to you for borrowing money. It includes your interest rate, points, fees, and other charges associated with your loan (expressed as a yearly rate). That's why it may be higher than the interest rate.

Appraisal

A home appraisal is used to determine the current market value of the desired property, and it can save you from paying more than what it’s really worth. We require an appraisal before finalizing a loan.

Break-even Point

When you recover the upfront costs of refinancing from the savings associated with a lower monthly payment or shorter loan term.

Closing Costs

The amount you pay the day you close on a home. Closing costs will vary, but this is typically 1% to 2% of the purchase price.

Credits

For a home loan, if you receive credits, you'll be getting a higher interest rate in exchange for money back at closing.

Credit Score

Your credit score is determined by things like payment history and how long you've had credit. Lenders use this number to figure out how likely you are to pay back your loan and what interest rate you'll get.

Debt-to-Income Ratio

This percentage is your total monthly expenses divided by your gross monthly income.

Down Payment

Amount paid up front when you purchase a home and isn't part of the loan. Having a down payment will decrease your home loan amount and may qualify you for a better interest rate. You may also need to cover closing costs in addition to a down payment, which adds to the total amount you pay up front.

Earnest money

This is the amount you put down during an offer as a deposit toward your desired property. It helps show the seller you’re serious, protects the seller, should the deal fall through, and protects you if something’s wrong with the property. Unless you walk away for a reason not covered in your contingencies contract, this amount is refundable. And, if the sale goes through, it counts toward your down payment and closing costs.

Escrow account

This is an account you fund and your mortgage servicer manages. Each month when you make your mortgage payment, you’ll pay extra to cover your HOA fee, property taxes and homeowners insurance. Those funds are placed in escrow and used by the mortgage servicer to make payments on your behalf.

Estimated Property Taxes

Annual property taxes are usually determined by your local government and often based on a percentage of the home's assessed value.

Fixed-rate mortgage

Your rate won’t change, and your monthly principal and interest payments will stay the same over the life of your loan.

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Homeowners Association Dues

An amount homeowners are required to pay for common services or amenities within their community. This can include trash pickup, landscaping, pool maintenance and snow removal.

Interest rate

This is a cost a lender charges to you for borrowing money and can be fixed or variable depending on which loan you choose.

Loan-to-value

Loan-to-value (LTV) is a ratio lenders use to assess risk before approving a mortgage. The ratio is calculated by dividing the desired loan amount by the appraised home value. Typically, the loan is considered higher risk if the ratio is high.

Loan Estimate

This document provides all the information about a lender's offer when you apply for a home loan, including your loan amount, interest rate, monthly payment, closing costs and other details. Lenders are required to provide you with a Loan Estimate within 3 business days of receiving your application.

Monthly Expenses

The total amount you're required to pay each month toward credit card debt, car loans, student loans, child support, alimony or other financial obligations.

Non-conforming loans

Non-conforming loans are ones that are too large to meet financing limits set by the Federal Housing Finance Agency (FHFA). This means they can’t be purchased by Fannie Mae and Freddie Mac like standard loans, and they have different underwriting guidelines.

Points

For a home loan, if you choose to pay points, you'll be getting a lower interest rate in exchange for paying more upfront. This increases the amount you need to pay at closing.

Private Mortgage Insurance (PMI)

This protects the lender if a borrower defaults on a home loan. PMI usually increases the monthly payment amount until the borrower pays off the equivalent of the 20% down in principal.

Property Taxes

Annual property taxes are usually determined by your local government and often based on a percentage of the home's assessed value.