Knoxville Mortgage Basics: Terms You Should Know

Every industry has its lingo.

The mortgage world can be a confusing place if you’re not familiar with some of the common terms.

But don’t fret, we’re going to cover some Knoxville mortgage basics and terms that you should know before buying your first home.

PITI

PITI stands for principal, interest, taxes, and insurance. These items are what make up your mortgage payment.

The principal is the balance you owe on a loan. Interest is the money that is being charged to you for the loan that you borrowed.

In addition, most loans have an escrow account that included taxes and homeowner’s insurance. Each month 1/12 of your property taxes and homeowner’s insurance is put in your escrow account, that way when those items become due, your escrow account can take care of paying them.

APR

APR stands for annual percentage rate. APR is the yearly rate that is charged for borrowing the money.

APR is often confused with the interest rate. The interest rate is what the mortgage company is borrowing for borrowing the money.

The APR encompasses both the interest rate and any fees the lender is charging you in addition to your closing costs. The APR is the best way to see how much you’re being charged for the loan when it comes to comparing mortgage companies.

ARM

An ARM is an adjustable rate mortgage. Unlike a fixed interest rate, an ARM will change rates over time.

For the first few years of a loan, the interest rate starts out low. Then after the set fixed period of time, the interest rate adjusts once per year based on an index added to a constant number. Keep in mind, there is a cap on how high an interest rate can go.

ARMs are typically used for people who aren’t planning on being a home for long. It allows them to secure a lower interest rate for a shorter period of time before the interest rate adjusts.

Fixed Rate

A fixed rate mortgage is one of the most common types of mortgages. It’s a loan where the interest rate remains the same over the whole course of the loan. The loan term can vary. The most common loan terms are a 15 year and a 30-year loan.

Escrow

You may hear the term escrow account thrown around when you’re applying for a mortgage. An escrow account is what takes care of paying your taxes and your homeowner’s insurance. Also, for certain loans, it takes care of paying mortgage insurance.

Included in each of your mortgage payments will be 1/12 of those items. When those items become due and payable, it takes care of paying them. For a mortgage company, it ensures that property taxes and insurance get paid on a yearly basis. It also makes things easier for a borrower, since those items are automatically saved for every year.

Pre-Approval Vs. Pre-Qualification

Contrary to what you may believe, there is a significant difference between pre-approval vs. pre-qualification. Here’s the difference.

A mortgage pre-qualification is merely an estimate how much you can afford and how much a lender is willing to lend. Getting pre-qualified is a fairly simple process, it usually involves talking with a loan officer and discussing your income, debts, assets and a potential down payment. With that information, they will be able to give you a ballpark of how much you can afford and how much your monthly payment will be. When you get pre-qualified, no information is verified.

In contrast, a mortgage pre-approval is a little bit more involved than pre-qualification. When you get pre-approved, a lender makes a commitment to provide you with financing and you make a commitment to use them for your loan.  You provide them with all documentation for your income, assets, and debts. The will also pull your credit to pre-approve you. With that information, they will provide you with a pre-approval letter saying how much they are willing to loan you to buy a home. A pre-approval, though, does not guarantee that you will get a mortgage loan, there are other things that have to be verified prior to final approval.

The biggest difference between the two is that a pre-approval takes more work and holds more value since the information is verified.

DTI

DTI stands for debt-to-income ratio. Debt-to-income ratio is a simple way that lenders measure your ability to make payments.

It measures how much debt you have compared to your gross monthly income (i.e. income before taxes). To figure out your DTI, you take all your monthly debt divided by your gross income. For example, if you make $4,000 a month and you have $1,575 in total monthly debt, your DTI is 39%.

Every loan type has a certain allowable DTI in order to qualify for the loan.

We’ve helped countless homeowners buy their first home and we’d love to do the same for you. Rick can be reached at 865-696-9002 or via email at Rick@KnoxvilleHomeTeam.Com. Kati can be reached at 865-696-1888 or via email at Kati@KnoxvilleHomeTeam.Com.