For now, here is a quick explanation of some of the terms you may hear...

CREDIT SCORE

The numerical score created by the three big credit reporting agencies that track the way we all use credit.

Your score is determined by how much you owe, how timely you have made your payments, how long you've had credit accounts, what types of credit do you have, and how much of your available credit is new.

The higher your score, the better loan options you'll have.

DOWN PAYMENT

The portion of the purchase price not covered by the loan program you qualify for.

Your down payment must be paid in cash from your funds at closing.

Your down payment could be anywhere between $0 and 20% of the home price or more depending on which loan program you use.

DTI (DEBT-TO-INCOME RATIO)

The percentage of your income that will be required to make the payments on all of your debt, including your new mortgage.

All debt includes car payments, other installment loans, credit card minimum payments, and any other payment obligations you have.

If your new home has HOA dues, those count in your debt-to-income ratio also.

LOAN PROGRAMS

The different types of loans available, with varying qualification requirements (credit score, down payment, DTI, etc...)

Your lender or I can help explain the differences between Conventional, FHA, VA, Portfolio, Jumbo and other loan programs.

Your available down payment, credit score and DTI will determine which of these loan types are available to you.

PRINCIPAL or PRINCIPAL BALANCE

The amount of money you borrow or owe on your loan.

This amount goes down each month as you make payments.

INTEREST

The money you pay the lender for the use of their money.

The amount of interest you pay is calculated from the current principal balance and the interest rate.

You pay less interest each month as your principal balance goes down.

INTEREST RATE

The percentage by which your monthly interest is calculated.

Interest rates are set by market forces and by your credit score.

The lower the interest rate, the less you pay back in addition to the principal.

FIXED RATE MORTGAGE

A mortgage whose interest rate is fixed and does not change for the term of the loan.

Most mortgages are fixed rate mortgages, so the interest rate does not change from one year to the next.

ADJUSTABLE RATE MORTGAGE (ARM)

A mortgage whose interest rate can change over the first several years of the loan.

Adjustable rate mortgages often start at a lower interest rate than currently-available fixed rate mortgages, but the rates can adjust based on market forces and can end up significantly higher than those currently-available fixed rate mortgages.

BUY DOWNS

Paying extra closing costs at the beginning of a mortgage to reduce the interest rate for the first year or two.

This allows buyers to start with a lower payment, and may make sense when they expect their income to change in the near future.

Although the interest rate (and therefore the principal and interest payment) changes after the buy-down period, the rest of the mortgage is at a fixed rate.

AMORTIZATION

The calculation that keeps the combined amount of principal and interest you owe each month the same as you pay back your loan.

At the beginning your principal balance is high, so a large portion of your payment pays the interest, and the rest pays down your principal.

Each month your principal balance is a little less, so the interest is less, and a greater portion of your payment goes to reduce your principal balance.

Principal and interest payments are subject to change with adjustable rate mortgages or buy downs.

LOAN TERM

The number of years/months your loan is amortized to be paid off.

30 year and 15-year are the most common loan terms available, but your lender may have other options.

The shorter the term, the higher your payments, but the less interest you'll pay over the life of your loan.

PREPAYMENT

Paying more than your scheduled payment to pay off your loan faster.

The extra amount you pay is applied to your principal balance, which reduces the amount you owe.

Since your principal balance is lower, you also pay less interest (and therefore more principal) in every future payment (even if you don’t make additional prepayment, but especially if you do), which speeds you toward loan payoff!

PITI

Your total payment will include Principal and Interest and also Taxes and Insurance.

The Principal and Interest portion of your payment does not change over the life of your loan.

Your mortgage company also collects money from you each month in your payment to cover your property taxes and homeowner's insurance, and then they pay those payments for you when they are due once or twice a year.

Since property taxes and insurance change over time, this portion of your payment is re-calculated each year, and your total payment will adjust (usually up a little bit) over time.

CLOSING COSTS

The loan-startup costs that must be paid (in addition to your down payment) when you close on your loan.

Closing costs include numerous items that fit into two categories...

The fees and expenses it takes to get your loan started--origination fee, appraisal fee, underwriting fee, etc...

Pre-payment of a few months of taxes and home-owners insurance, since those payments will likely be due before you have made 12 payments.

Closing costs will typically be around 2%-3% of the amount borrowed.

Buy-down options significantly raise closing costs.

Depending on how competitive the market is, we may be able to get the seller to help cover some of your closing costs.

CASH RESERVES

The amount of cash savings you'll have available after paying your down payment and closing costs.

It is a good idea to keep some cash reserves in case things break or you have a pause in your income.

Your cash reserves may influence what kinds of loan you can qualify for.

REFINANCE

You can start a new loan later to replace the loan you use to buy your home.

Many homeowners do this, and often more than once. There are two reasons this may make sense for you in the future...

Interest rates may come down. Many homeowners refinance to a lower rate to either reduce their payment or accelerate their payoff.

You may want to use the equity in your home for something else. The value of your home will probably rise over time, and the amount you owe will be coming down. You may choose to take out a bigger loan against the higher value of your home, pay off your smaller existing loan, and use the cash difference for something important.

This last bit of lingo isn't related to your loan at all, but people often get confused because it involves cash out of your pocket, and it comes up around the same time all the loan lingo is being thrown around...

EARNEST MONEY

A good-faith deposit you pay the seller when we agree upon a contract to purchase.‍ ‍

Earnest money is held by a neutral third party and then credited to you toward your down payment and closing costs when we close.

It is NOT an extra amount you have to pay in addition to those costs! You pay a portion of your down payment and closing costs when we start the contract, and then you pay the rest when we close.

Earnest money is usually about 1% of the purchase price of your new home, and other than what you choose to pay for inspections, it is the only cash expense before closing (the rest of your down payment and closing costs are paid at closing).

Your earnest money will be refunded to you if we need to cancel your contract because of negative things we learn about the home as we investigate before your closing.