It’s (relatively) easy to recover from that awkward social moment when you thought “LOL” meant “lots of love” instead of “laughing out loud.” But confusing your mortgage acronyms? That’s a mistake that can cost you money.
Mortgage professionals are a key part of shopping for a new home, but the problem is, sometimes they use so many acronyms that it sounds as if they’re speaking a foreign language. “These acronyms have turned into words themselves and have become commonplace across the industry,” says Eric Gotsch, area sales manager at Wells Fargo Home Mortgage.
Knowing what all those acronyms mean will only help you understand what everyone’s talking about and make the experience less frustrating. “You need to take time to understand these [acronyms] so you understand what your loan will cost,” says Cara Ameer, a broker associate at Coldwell Banker Vanguard Realty, which focuses on the Ponte Vedra Beach, FL, real estate market.
What does LTV mean? Read on to find out!
- ARM (Adjustable-Rate Mortgage): No, not the body appendage. While fixed-rate mortgages have the same interest rate and monthly payment for the life of the loan, the interest rate and monthly payments on an ARM change (hence the word “adjustable”). ARM interest rates are typically fixed for a period between three and 10 years before they change. The new payment is calculated using a rate based on an underlying index like LIBOR (not an essential acronym for home buying, but it stands for “London Interbank Offered Rate”) or the CMT (Constant Maturity Treasury) plus a margin. Understanding how your rate can change and how this can increase your payment is very important.
- CFPB (Consumer Financial Protection Bureau): This government agency is in charge of helping people understand government rules like “Know Before You Owe,” which replaced the Good Faith Estimate in 2015. The agency enforces rules like Know Before You Owe, which provide borrowers more transparency in the mortgage process and knowledge about what they can afford.
- DTI (Debt-to-Income): This ratio is the percentage of your income that goes toward paying monthly bills. Lenders typically require DTIs below a specified percent for you to qualify for certain loan products.
- FHA Loans (Federal Housing Administration Loans): These loans were established during the Great Depression during the 1930s and essentially make buying a home more accessible by providing mortgage help and letting borrowers qualify for a loan with a down payment of just 3.5% (instead of the recommended 20% down payment).
- HELOC (Home Equity Line of Credit): It works like a credit card, except you draw against the equity in your home.
- IO (Interest Only): These are monthly payments of just interest. Certain mortgages allow for these lower payments for a specified period. These loans work best for consumers who expect a significant bump in income or plan to refinance or move prior to the end of the interest-only term.
- LOX (Letter of Explanation): Not to be confused with smoked salmon, typically eaten with cream cheese and bagels. These are short letters provided to a lender that explain changes in income, defend late payments, or summarize your rental history. They can help you qualify for your mortgage.
- LTV (Loan-to-Value): This ratio is calculated by dividing the loan amount by the home’s purchase price. For example, when people put 20% down, their LTV is 80%. Lenders have special programs for borrowers who put down less than 20%.
- MIP (Mortgage Insurance Premium): Not a sound a robot makes, but rather a fee that’s financed as part of the loan and charged by the government for FHA loans. This special program allows first-time buyers to put down less than 20% on their purchase.
- P&I (Principal and Interest): These payments are the amount due every month on your mortgage.
- PITI (Principal, Interest, Taxes, and Insurance): Not a sad party, but rather your total monthly housing expense, which includes the P&I payment due on your mortgage and the taxes and insurance on your house.
- PMI (Private Mortgage Insurance): PMI is an extra fee you pay when your down payment is less than 20%.
- POC (Paid Outside of Closing): Fees that are paid upfront with your loan application, like appraisal or inspection fees.
- QMs (Qualified Mortgages): Must meet certain requirements specified by the Dodd-Frank Wall Street Reform and Consumer Protection Act, such as loan amount, interest rate, and underwriting, so they can be purchased by a government-sponsored entity.
- RESPA (Real Estate Settlement Procedures Act): Not the cousin of a Vespa scooter. More like a map, since it requires that you receive certain disclosures about closing costs and settlement procedures at certain times during the mortgage process.
- VOE (Verification of Employment): Proof of your income in the form of W-2s, pay stubs, or income tax returns.
- WDO (Wood-Destroying Organism): Termites. Enough said.
And if you ever find yourself sounding out acronyms while trying to follow along with your lender, follow this wise advice from Eric Gotsch: “Asking will never be a stupid question, especially during something as important as the home-buying process.”