By Rob Greenbaum, Vice President of Sales with AAFMAA Mortgage Services LLC (AMS)
Just like the military, the mortgage industry uses plenty of acronyms. And if you’re a first-time home buyer who is unfamiliar with the lingo, it might sound like a foreign language. Fortunately, this list gives you insight into the top 11 you’ll really want to know going into any meeting with a mortgage lender.
APR (Annual Percentage Rate): APR tells you the annual cost of borrowing money based on the loan amount, interest rate, and certain other fees. This number is different from the interest rate because it allows you to compare the true costs from several lenders directly to help you find the best deal. With our calculator, you can determine the effective APR of a mortgage when you include upfront loan costs like closing costs, attorney and lender fees. This interest rate tracker by Freddie Mac can be a helpful tool when tracking rates and the APR.
ARM (Adjustable-Rate Mortgage): While fixed-rate mortgages offer the same interest rate and monthly payment for the life of the loan, just as the name suggests, the interest rate and monthly payments on an ARM can change periodically. An ARM rate is set using the value of an underlying financial index, like LIBOR (London Inter-Bank Offered Rate), and adding an additional percentage, called a margin, to the index. ARM interest rates typically start lower than fixed-rates, and stay at that introductory rate for three to 10 years before they become adjustable. With our calculator, you can determine the effective APR of an ARM.
DTI (Debt-to-Income): This ratio is the percentage of your income that goes toward paying monthly debt — calculated by dividing your monthly debt obligations by your monthly gross income. Lenders typically require DTIs below a specified level for you to qualify for a mortgage. Higher DTIs could mean you’ll pay more interest or you may not qualify for a loan.
FRM (Fixed-Rate Mortgage): A fixed-rate mortgage has an interest rate that does not change during the term of your loan. This mortgage is popular with buyers who want stability in their monthly payments.
LE (Loan Estimate): This is a federally required document you should receive from a lender within three days of submitting a complete loan application. It provides the details of your loan, and the estimates of the costs you will pay at closing.
Loan Term (LT): The term indicates how long you’ll be making payments on the loan. Two popular choices are 15- and 30-year mortgages.
LOX (Letter of Explanation): These are short letters you may be asked to provide to a lender that explain questions that arise during underwriting, such as why your income has changed, your rental history, or any late payments on your credit report.
LTV (Loan-to-Value): This ratio is calculated by dividing the loan amount by the home’s purchase price if you are buying a home, or the current home value if you’re refinancing. So if you put 20% down when buying a home, your LTV would be 80%. There are conventional loan products that allow you to put as little as 3% down, FHA loans require at least 3.5%, and VA and USDA Loans allow buyers to put zero down but have other associated fees and eligibility requirements.
P&I (Principal and Interest): P&I is the portion of your monthly mortgage payment that goes toward paying off the money you borrowed to buy your home. For most homeowners, P&I will make up the majority of your monthly mortgage payment.
PITI (Principal, Interest, Taxes, and Insurance): Your total mortgage payment each month will usually include principal, interest, taxes and insurance if you escrow your taxes and insurance. This monthly payment calculator can give you a more complete picture of the costs of homeownership.
PMI (Private Mortgage Insurance): PMI is an insurance that protects lenders from losses if you are unable to pay your mortgage. It is required for homebuyers using a conventional loan who make down payments that are less than 20% of the home’s purchase price. Lenders may not require a down payment or PMI for VA Loans, however, VA Loans have funding fees. Your lender can help you determine any applicable fees and costs associated with your mortgage.
We’re Here to Help
When you’re buying a home, or refinancing your current mortgage, there are several types of loans for you to consider, and AAFMAA Mortgage Services LLC is ready to assist you. You’ll get an honest and fair assessment of your mortgage options from Military Mortgage Advisors who understand military life and have years of experience handling many different types of mortgages.
We strive to provide members of the military community with low-cost and low-rate mortgages to build, buy or refinance their homes. We want to make sure you get the right mortgage to best meet your needs. Get a free mortgage assessment today!