Mortgages & More: A to Z
When you make the life-changing decision to purchase a home, nobody tells you that the process comes with a full glossary of acronyms, terms and maybe even some quaint names like Fannie Mae. Many of the words like mortgage and refinance are commonly understood or self-explanatory, but some finance jargon can make the process even more intimidating. EnTrust Funding (ETF) wants your home-buying or refinancing experience to be letter-perfect so here is an alphabetical list of some terms you may encounter:
APR | APR or annual percentage rate refers to the interest rate you pay on a loan, but it is the cost to borrow money as a yearly percentage. It can include points and fees as well.
ARM | An adjustable-rate mortgage – also known as variable-rate – is a loan in which the interest rate will change periodically throughout the life of the mortgage. It typically starts out lower and will change based on market fluxes.
Cash-Out Refi | A popular refinancing option when a home value has increased and/or interest rates have dropped. It entails receiving the monetary difference between the new loan and the home’s appraised value.
Conventional | A conventional mortgage or refinance refers to a traditional loan from a private lender that isn’t formally backed by the government (such as FHA) but follows guidelines set by the Fannie Mae and Freddie Mac agencies. Terms and interest rates are typically fixed.
Debt Consolidation | Cash-out refinancing can be an astute method of paying down credit card debt or student loans and consolidating the debt into one manageable payment.
DTI | Debt-to-income ratio is a personal finance measure that compares a borrower’s monthly expenses or debt to their overall income, allowing mortgage lenders to determine ability to manage the new payment.
FHA Loan | The Federal Housing Administration approves and insures these mortgages for borrowers who may have lower income, less down payment or poor credit scores.
FICO | The Fair Isaac Corporation creates a 3-digit score based on information in your credit report from credit cards, auto loans etc., which is then used to assess credit risk.
Fixed Rate | This refers to a type of loan with an interest rate that doesn’t fluctuate for the life or specified term of the loan.
Fannie Mae & Freddie Mac | These are nicknames for the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), which are government-sponsored enterprises that guarantee and purchase loans from mortgage lenders to free up capital in the industry.
IRRRL | Interest Rate Reduction Refinance Loan – this refers to a VA loan that is “streamlined” from an existing VA loan. It’s a simplified process and often accomplished with zero money down.
Jumbo Loan | An purchase loan or refinance that exceeds the normal limit set by Fannie Mae and Freddie Mac.
LTV | The loan-to-value ratio describes the amount being borrowed compared to the appraised property value. A max of 80% is typical and the LTV can determine interest rates.
Non-QM | Although it stands for non-qualifying mortgage and is based on rules set by the Consumer Financial Protection Bureau, non-traditional borrowers like independent contractors may actually qualify through a variety of programs as previously discussed here.
PMI | Private mortgage insurance is typically required on conventional loans with less than 20% down payment. (That extra cost can be eliminated through refinancing with adequate equity and lower interest rates.)
Principal | This refers to the amount borrowed on which the interest is calculated.
Reverse Mortgage | Also known as HECM or a Home Equity Conversion Mortgage. This is available to homeowners, 62 or older, who wish to convert their equity into cash payments to assist in retirement.
Streamline | Generally referring to an FHA refinance for existing FHA borrowers. It provides a quicker process with less requirements to achieve a lower rate.
USDA Loan | This type of home loan is available to rural and suburban homebuyers, requiring zero down payment. Similar to FHA and VA-backed loans, the USDA guarantees the mortgage issued by the lender.
VA Loan | The Veteran’s Administration provides borrowing opportunities to active military and veterans that include 100% financing and zero down where qualified.
We hope this mini glossary of lending terms helped to clear up possible confusion, but we welcome you reach out for a more in-depth look at the words and objectives that you’re facing.
EnTrust Funding has the knowledge and resources to make your mortgage or refinancing process – in a word – easy!