Source: Freddie Mac®
PITI, ARM, LTV, FRM… homebuying acronyms making your head spin? We’ve got you covered. Like every other industry, the mortgage world has a plethora of acronyms. And if you’re in the process of buying a home, knowing the terminology is important to help you understand what you’re agreeing to.
Here’s a cheat sheet of 10 acronyms provided by Freddie Mac® that you can reference as needed to navigate through the mortgage process.
APR (Annual Percentage Rate)
The annual percentage rate tells you the annual cost of borrowing money based on the loan amount interest rate, and certain others fees. The APR is the bottom-line number you can use to shop and compare rates among lenders.
FRM (Fixed-Rate Mortgage)
A fixed-rate mortgage has an interest rate that does not change during the entire term of your loan. This is the most common type of mortgage, giving you certainty and stability over the life of the loan.
ARM (Adjustable-Rate Mortgage)
An adjustable-rate mortgage usually give you lower monthly payments at the onset, but over time your payments will change with interest rates. With this type of mortgage your interest rate adjusts after an initial period — typically 3, 5 or 7 years — and resets periodically.
The loan-to-value ratio divides the amount of money borrowed by the appraised value of the home and tells you how much of your home you own versus how much you owe on your mortgage. Lenders use it to help evaluate the risk and terms of your loan.
The debt-to-income is the percentage of your monthly income that goes toward your monthly debt payments. Lenders typically use this to measure your ability to manage monthly payments and repay debts.
PMI (Private Mortgage Insurance)
Private mortgage insurance is an insurance that protects lenders from losses if a homeowner is unable to pay their mortgage. It is required for homebuyers who make down payments that are less than 20% of the home purchase price. Typically, PMI will be incorporated into your monthly mortgage payment.
P&I (Principal and Interest)
Principal and interest are the portion of your monthly mortgage payment that goes toward paying off the money you borrowed to buy your home. For most homeowners your principal and interest make up the majority of your monthly mortgage payment — but not all of it.
PITI (Principal, Interest, Taxes and Insurance)
Together, principal, interest, taxes and insurance make up your total monthly mortgage payment. Calculating your total monthly payment, not just principal and interest, is an essential part of the loan approval process because it will give you a more accurate picture of the costs of homeownership.
UPB (Unpaid Principal Balance)
The unpaid principal balance is the amount of principal still owed on a loan. On a typical monthly mortgage payment, a portion of your payment is applied to the interest and a portion is applied to the principal. The following month’s interest is based on your UPB. You can check how much how much of your payment is going towards your principal by looking at your amortization schedule.
HOA (Homeowners Association)
20% of America’s homeowners that live within a community governed by a Homeowners Association. If you are considering buying in one of these communities, it’s important that you pay your fees as scheduled – typically monthly, quarterly, or annually. HOA fees vary from community to community and may cover services such as trash removal, lawn care and maintenance for common areas, pest control.
Taking the time to understand these mortgage acronyms will pay off when your comparing and negotiating your way through the homebuying process. And it is IMPORTANT that you shop around and skillfully manage the mortgage process to protect the financial health of your family. A recent study from Fannie Mae indicated that while people are eager to compare costs for ordinary goods most don’t take the time to shop for the best mortgage rates. This one step can possibly save you tens of thousands of dollars.
To learn more about the homebuying process explore other articles on Consumer Home Value. The goal is to help people save money in real estate transactions. Our intent is to change the real estate marketplace from one that is filled with confusing propaganda that doesn’t serve people to one where confident consumer’s direct the market.
Certified Residential Appraiser, Gynell has a diverse appraisal background covering Commercial, Residential, Rural, Complex and Luxury Properties as well as National Appraisal Review work in the secondary Market. She began her Appraisal training in Oklahoma in 2001 covering Rural and Commercial Properties. With several years as a National Review Appraiser at Fannie Mae and other big banks, Gynell has keen insight into the secondary market guidelines and requirements.