EMDs and ARMs and ARPs, oh my! MSGCU breaks down common mortgage terms.By MSGCU on 9/3/2024

 

When applying for a mortgage, you’re bound to see some jargon. Whether you’re going through your first mortgage experience, or you’ve been through the process a time or two, it can be confusing. Read on for key mortgage terms, what they mean, their significance, and when a homebuyer might see them.

Annual Percentage Rate (APR)

Definition: APR reflects the true annual cost of borrowing, including interest and any additional fees or costs.
Why it matters: A higher APR means a higher cost of borrowing. It’s important to know each loan offer’s APR when comparing different options, versus looking at the interest rate alone.
When you'll see it: During the loan application process and in loan estimates provided by lenders.

Points (or discount points)

Definition: Points are upfront fees that are paid to the lender at closing in exchange for a reduced interest rate on the mortgage. One point typically equals 1% of the loan amount.
Why it matters: Paying points can lower your monthly mortgage payment and reduce the total interest paid over the life of the loan. Determine if paying points is beneficial by comparing the upfront cost against the long-term savings from a lower interest rate.
When you'll see it: In discussions with the lender prior to closing, and at closing.

Pro tip: Some lenders may lure you in with a low rate then charge hidden fees or points which will make the APR much higher. MSGCU offers market-leading rates and no application fees for our mortgage loans. We are here to help every step of the way and offer an Interest Rate Float Down and Rate Lock and Shop so you can have the best rate while you hunt for your perfect home.

Debt to Income (DTI) ratio

Definition: The DTI ratio is the percentage of a borrower’s gross monthly income that goes toward paying debts.
Why it matters: A higher DTI can affect loan approval chances and loan terms. Lenders typically prefer a lower DTI.
When you'll see it: During the loan prequalification and approval processes.

Principal, Interest, Taxes and Insurance (PITI)

Definition: PITI represents the total monthly mortgage payment, including the principal, interest, property taxes and homeowners insurance.
Why it matters: This gives the full picture of the monthly payment.
When you'll see it: On monthly mortgage statements, during loan discussions with lenders and your initial and closing disclosure.

Loan to Value (LTV) ratio

Definition: LTV ratio is the ratio of the loan amount to the appraised value of the property.
Why it matters: A higher LTV can result in higher interest rates and the need for private mortgage insurance. It also influences loan approval.
When you'll see it: During the loan application process and property appraisal.

Earnest Money Deposit (EMD)

Definition: An EMD is a deposit that’s made by the buyer to show their serious intent to purchase a property. It’s typically held in an escrow account (and even be casually referred to as an “escrow deposit”) until closing.
Why it matters: An EMD can affect closing costs, as this deposit is usually credited toward the buyer’s down payment (reducing the LTV) or closing costs. If the deal falls through due to the buyer’s fault, the seller may keep the EMD.
When you'll see it: Typically, during the house hunting phase, when making an offer.

Escrow

Definition: An escrow account is where funds, such as taxes and insurance, are held by a third party to ensure that conditions in a real estate transaction are met.
Why it matters: It ensures that property taxes and insurance premiums are paid on time. Escrow can affect closing costs and monthly payments.
When you'll see it: Throughout the mortgage process, particularly at closing and in monthly statements.

Taxes and Insurance (T&I)

Definition: These are payments collected by the lender for property taxes and homeowners’ insurance, held in an escrow account.
Why it matters: T&I can increase the monthly mortgage payment, as the lender collects these amounts to pay the bills on behalf of the homeowner.
When you'll see it: On the monthly mortgage statement, your annual Taxes and Insurance Disclosure Statement, and during closing as part of the escrow setup.

Private Mortgage Insurance (PMI)

Definition: PMI is insurance required by lenders if the down payment is less than 20% of the home’s purchase price. PMI protects the lender if you stop making payments on your loan.
Why it matters: It increases the monthly mortgage payment until the borrower reaches 20% equity, at which time, the borrower can request cancellation.
When you'll see it: During loan approval and on monthly mortgage statements.

Prequalification letter

Definition: A preliminary assessment by a lender of how much you might be eligible to borrow based on self-reported financial information.
Why it matters: It gives a rough idea of your borrowing power, but is not a guarantee of a loan.
When you'll see it: Early in the house-hunting process.

Preapproval letter

Definition: A more detailed evaluation where the lender verifies your financial information and conditionally approves you for a specific loan amount.
Why it matters: Stronger than prequalification, it indicates to sellers that you are a serious buyer and have your financing lined up. It may also provide an advantage over another potential buyer if the seller is considering two similar offers.
When you'll see it: After submitting financial documents and undergoing credit checks.

MSGCU offers a True Preapproval that prepares you with your real numbers and can be ready in as little as one to two hours.

MSGCU’s experienced mortgage consultants will help you every step of the way in your homebuying journey and can help guide you on the best way to utilize points for your monthly mortgage payment.

Adjustable-Rate Mortgage (ARM)

Definition: A type of home loan where the interest rate can change periodically based on the performance of a specific index. Typically, an ARM starts with a fixed interest rate for an initial period (such as 3, 5, 7, or 10 years), after which the rate adjusts annually according to the index it is tied to.
Why it matters: ARMs can offer lower initial interest rates compared to fixed-rate mortgages, making them attractive for borrowers who plan to sell or refinance before the adjustable period begins. However, because the interest rate can increase after the initial fixed period, there’s a risk of higher monthly payments later on.
When you’ll see it: Early in the mortgage application process, especially when discussing loan options with your lender. They are usually presented as an option when you’re deciding between fixed-rate and adjustable-rate mortgages.

Fixed-Rate Mortgage

Definition: A mortgage loan option with a set interest rate for the entire length of the loan.
Why it matters: Fixed-Rate Mortgages are appealing when interest rates are low and you can lock in low rate and keep it for your loan length. Unlike ARMs, your rate will be the same no matter if you have a 10, 15, 20, or 30 year loan.
When you’ll see it: Like the ARMs, you will see this option early in the mortgage application process. Talk with one of our experienced mortgage consultants to determine if a Fixed-Rate Mortgage is the right option for you.

Jumbo loan

Definition: A type of mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by region. In Michigan it’s a loan of more than $766,550.
Why it matters: Jumbo loans come with different underwriting standards compared to conforming loans. Since they are not backed by government-sponsored entities like Fannie Mae or Freddie Mac, they often require higher credit scores, larger down payments and lower debt-to-income (DTI) ratios. Additionally, interest rates on jumbo loans can be higher, reflecting the greater risk to the lender.
When you’ll see it: You’ll encounter jumbo loans during the mortgage application process if you’re purchasing property over the loan limit.

Non-warrantable condo loan

Definition: Any condo that doesn’t meet conventional mortgage standards, such as incomplete developments or time shares.
Why it matters: Non-warrantable condos are considered riskier investments for lenders, leading to higher interest rates, larger down payment requirements, and more stringent underwriting criteria. It’s crucial to be aware of this if you’re buying a condo because obtaining financing can be more challenging, and you may have fewer loan options.
When you’ll see it: When you’re considering the purchase of a condo. If the condo you’re interested in is deemed non-warrantable, it will likely come up during the mortgage pre-approval process or after your lender reviews the condo’s financials and association documents.

Non-warrantable condo loans are considered unique and while not every lender offers them, MSGCU does. We offer flexible options for new builds and established properties.

Fannie Mae (FNMA)

Definition: FNMA is a government-sponsored enterprise (GSE) that purchases conventional mortgages.
Why it matters: FNMA creates an outlet for credit unions, banks, and lenders to sell loans, providing the ability to lend to more borrowers. At MSGCU we sell loans but retain the servicing for your loan, this means you will always make your payment to MSGCU.
When you’ll see it: This will be in your closing documents but is a great question to ask at application.

Federal Housing Administration (FHA)

Definition: FHA is a government agency that provides mortgage insurance on loans made by FHA-approved lenders.
Why it matters: FHA loans often require lower down payments and have more lenient credit requirements, but they include mortgage insurance premiums (MIP).
When you'll see it: When applying for an FHA loan and on monthly statements.

These key mortgage terms are valuable in understanding the full scope of mortgage payments, closing costs and the home buying process. Use these mortgage definitions to successfully navigate this process and your mortgage payments for years to come.

Have questions or want to learn more? Stop by any one of our 22 branches, chat, or call. We’re here to help.

Category: Finance

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