For more terms and definitions, please check out our Mortgage Glossary.
What is a Mortgage?
A Mortgage, or home loan, is a legal contract made between a lender and a borrower that uses the transfer of an interest in property to the lender as a security for a debt. While a mortgage in itself is not a debt, it is the lender's security for a debt. The lender can take possession of the property if the borrower fails to pay the prearranged home loan payments. Use our mortgage calculator to get an idea of what you may be able to afford.
What is a Mortgage Refinance and why should I refinance?
A refinance is when the borrower uses the money from a loan to pay off an existing home loan. There are numerous reasons customers refinance the loans they already have, including; to lower the monthly payment or interest rate, to switch from an adjustable rate to a fixed rate, or visa-versa, to refinance for a higher amount in order to pay off other debts or get cash, to use some money out of their equity, or most commonly to improve overall cash flow.
What is the difference between a Fixed and Adjustable Rate?
With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the life of the loan, traditionally 15 or 30 years.
With an adjustable rate mortgage (ARM), the rate fluctuates according to the interest rates in the economy. Initial rates are typically offered at a discounted rate, lower than the rate for fixed mortgages, but will change over time. The ARM rate is capped on how much and how often the rate and/or payments can change in a year and over the life of the loan. When choosing which mortgage is right for you, consider factors that could affect your decision, such as how a higher monthly payment might impact your budget if the rate were to increase and the length of time you plan to stay in your home.
What is the difference between Interest Rate and APR?
The interest rate is the cost to borrow the money disbursed in the loan. The APR (Annual Percentage Rate) is the total cost of the loan over its life, including costs, points and fees.
How much do I need for a Down Payment?
You can purchase a new home with as little as 3.5% down, which can be partially or fully gifted. Check out this post to read more details 80% of Portlanders falsely believe you need 20% down to buy a home
What is LTV?
LTV stands for loan-to value. It is the total amount of your loan on the property divided by its fair market value. The LTV is calculated by the lender to see which type of loan you can qualify for as well as examining the risk of the loan. Higher LTV ratios are generally seen as higher risk and will generally cost the borrower more or will require the borrower to purchase mortgage insurance
Do I have to have perfect credit?
While it is true that if your credit score is high you may receive better rates and have more options available to you, this doesn’t mean you can’t obtain a mortgage if you’ve had some slips in the past. Credit is only one factor in the underwriting process, so don’t think that this alone will stop you from getting a loan; however, your credit history needs to demonstrate both willingness and ability to repay on time. Even if you’re sure you have excellent credit, it’s wise to double-check. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you’re waiting for mortgage approval. For tips to improve your credit check out our Grow Your Credit post.
What does DTI mean?
Your DTI helps determine how much house you can afford. When looking at a mortgage there is the front end ratio and the back end ratio that make this determination.
The Front Ratio is determined by adding together your proposed monthly mortgage payments, including principle and interest, taxes, insurance and any homeowners association or condominium complex dues. This total is then divided by your total gross income.
The Back Ratio – your DTI (Debt to Income) – is determined by adding together the total mortgage payment as above, plus any other monthly financial obligation including credit card payments, auto loans, or lines of credit, etc. This total is then divided by your gross monthly income. If you have no monthly payments besides your mortgage, your front and back end ratios will be the same.
Can I get Pre-Approved?
Yes, you can. Your information is reviewed, including your income, assets, and present debt, and a decision is made as to what you qualify for. Once pre-approved, you can look for a new home with the confidence of being a strong buyer, and sellers will feel more comfortable dealing with you. To start the pre-approval process, please visit our eApprove page.
What are Points?
Points are a one-time fee that a borrower pays to lower the interest rate. A point is a unit of measure that means 1% of the loan payment. So, if you take out a $200,000 loan, one point equals $2,000. Points can be charged as origination fees by the lender, but they can also be charged in order to lower your interest rate, which would lower your monthly payment. Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.
What are the Closing Costs?
Closing costs include items like appraisal fees, title insurance fees, attorney fees, pre-paid interest and documentation fees – to name a few. These items are paid by both buyers and sellers and are usually different for each customer due to differences in the type of mortgage, the property location and other factors. You will receive a good faith estimate of your closing costs in advance of your closing date for your review.
What is a Home Appraisal?
A home appraisal is a survey of a home by a professional appraiser to generate an estimate of the property market value. The appraisal is a detailed report that looks at various factors regarding the home including the condition of the home, the neighborhood, what comparable homes are selling for and how quickly they are selling. The home appraisal is not the same as a home inspection, which should also be completed when buying a new home.
Do I need a Home Appraisal?
Sometimes an appraisal is not needed; other times a full appraisal must be completed. Only after reviewing your application and collateral information is it determined whether one is needed for your situation.
What are Property Taxes and Impound accounts?
Property taxes are the taxes that are collected based on assessed value of the real property and are to be paid by the property owner. An impound account is an account set up by the lender for payment of property taxes, hazard insurance and any other recurring expenses such as mortgage insurance and flood insurance. Typically an impound account holds prepaid recurring costs for 2-6 months. Usually loans with a low loan-to-value ratio (higher down payment) do not have an impound account requirement.
How does Hazard Insurance work?
Hazard insurance is a type of property insurance purchased by homeowners to protect against fire, flood, wind, earthquakes or other disasters. Comprehensive homeowner’s insurance usually covers damage to property, as well as liability for injuries on the property or damage caused to other property. Hazard insurance tends to focus specifically on property damage caused by unique sources. The homeowner is responsible to pay this insurance policy as to protect the investment of the lender, which is why it is usually a requirement at closing. If the home is destroyed or damaged beyond practical repair, the ability of the homeowner to continue paying the mortgage will likely be significantly impaired at the same time the collateral securing the loan would be seriously devalued. Hazard insurance helps guarantee that at least the mortgage will be paid down.
What is Title Insurance?
Title insurance is protection against loss arising from problems connected to the title to your property. A home may have gone through several ownership changes before you purchased it, and the land on which it stands went through many more. There may be a weak link at any point in that chain of ownership that could emerge to cause trouble. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.
What is the role of the Escrow Company?
The Escrow Company is a disinterested third party who does not represent anyone in the transaction, but serves an integral role in the closing process. This role begins when an executed contract is delivered to the escrow company, who then begin a Title Search. Once the title to the property is deemed “clear”, the Title Insurance Policy is prepared. Additionally, the escrow company assigns an escrow officer to manage and facilitate the closing by being in contact with all parties involved in the transaction and making sure that all documents are properly gone over and signed. Finally, it is the escrow officer who distributes all signed and executed documents to the appropriate parties to ensure the successful transfer of title from one party to the other.
Are low down payments a bad thing?
Many of my clients are shocked to learn that they can purchase a home in today’s real estate market for 3.5% down payment, or $0 down with certain loan programs. In the same breath, they ask how this is possible … “isn’t that the whole reason we are in this mess today?!”. The honest answer is “No”. I will admit, there are certainly homeowners with negative equity that simply walk away from their homes – but what typically drives the foreclosures is the affordability of the monthly payment. In the not-so-distant past, borrowers were able to be qualified on a reduced mortgage payment, either because the payment required was simply interest-only, or that the initial interest rate was very small only to adjust a short while later. This false sense of stability is what got people into homes they truly could not afford.
In today’s lending environment we focus on the affordability component more than ever. If your income can support the full housing payment, in addition to any other monthly debts you have, then whether you put $0 down or 20% down payment on the home – we feel secure in your ability to make your payments and remain in the home. With rates this low, partnered with low prices and low down payment requirements – it is a fantastic time to look into your options.
What is a Good Faith Estimate?
A Good Faith Estimate, also called a GFE, is a form that lists basic information about the terms of a mortgage loan for which you've applied. If you applied for a mortgage before October 3, 2015, or if you are applying for a reverse mortgage, you will receive a GFE.
The GFE includes the estimated costs for the mortgage loan. The Good Faith Estimate provides you with basic information about the loan, which helps you:
- Compare offers
- Understand the real cost of the loan
- Make an informed decision about choosing a loan
The lender must provide you with a GFE within three business days of receiving your application or other required information. You can be charged a credit report fee before receiving a GFE. But, you can't be charged any other fees until you get the GFE and indicate that you want to proceed with the mortgage loan.
Definition provided by the Consumer Financial Protection Bureau