Loan Terminology

Amortization is the payment of a debt in equal installments of principal and interest.

Appreciation is the increase in value or price of a property over time.

A credit score is a number between a range (e.g. 350 and 850) that’s determined by the score model used. It’s based on your debts and likelihood of repaying them on time. The lender uses your credit score to determine the interest rate on your loan.

A debt-to-income (DTI) ratio is the comparison of a borrower’s monthly debt payments to the borrower’s monthly gross income, and it ultimately helps to determine the final loan amount.

Discount points represent the fee associated with the note rate for your loan. One point equals one percent of the loan amount. For example, one point on a $100,000 loan would equal $1,000.

A down payment is the portion of the purchase price that a buyer pays in cash at the beginning of the loan.

Earnest money is a deposit given by the buyer to the seller with the buyer’s offer to purchase the seller’s property.

Loan-to-value (LTV) is a ratio that divides the home loan value into the property value. For example, if your home is worth $100,000 and you owe $60,000, then your loan-to-value ratio is 100,000 divided by 60,000, or 60 percent.

Mortgage insurance is written by a private mortgage insurance company to protect the mortgage lender against loss due to default or foreclosure.

The fee the lender charges to generate the loan is called an origination fee. This is typically one discount point.

PITI is an acronym for the principal, interest, taxes, and insurance that make up your monthly payment.

Principal is the sum of money outstanding on your loan upon which interest is payable.

A reverse mortgage loan allows homeowners to borrow money using their home as security for the loan. Interest and fees are added to the loan balance each month. As your loan balance increases, your home equity decreases. The borrower is required to pay property taxes, insurance, maintenance, and related taxes. There are no monthly payments and the loan is repaid when the borrower no longer live in the home.

A second mortgage is an additional loan on your home and follows your first mortgage in priority.

Underwriting is the analysis of risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. It involves evaluating the property and the borrower’s ability to repay the loan.