Common Mortgage Terms, Cont'd

In our previous post, we provided definitions for a few terms which are commonly used in the mortgage industry. If you’re trying to buy a home, one of the last things you want is to be befuddled by unfamiliar lingo. Between saving for a down payment, searching for the right property, finding a suitable lender, and all the other tasks involved, potential buyers already have plenty to think about aside from real estate jargon. Buyers can help themselves out, however, by learning at least a few terms which are very likely to show up. Learning these terms will take a bit of extra energy, to be sure, but this is likely to be a worthwhile expenditure given the return. Knowing some terminology will help you navigate the real estate world more easily and significantly improve the buying experience.

Principal

No, this isn’t the same thing as the person in charge of your middle school. When you hear this term in the mortgage world, it’s referring to the balance of your loan. Your principal is separate from the interest or other fees you’ll pay which aren’t a part of your original loan balance. If you take out a mortgage loan of $250,000, and pay at a 4% interest rate, only a part of your payments will go specifically toward your principal; the other part will go toward your interest, and some may go toward any additional fees which were tacked on.

Discount Points

Discount points – often referred to simple as “points” – refer to money which is paid against the principal in order to lower the interest rate. Points are usually paid at closing. One discount point is equal to 1% of the principal. If you have a $200,000 loan, 1 discount point is $2,000. Lenders can offer lower interest rates on the loan in exchange for points. This can be financially desirable if a buyer services the loan over its schedule. Over time, the buyer can save a significant amount due to the lower interest rate.

Loan-to-Value (LTV) Ratio

Your loan-to-value ratio, or LTV, is a ratio of your unpaid loan balance and the appraised value of your home. This ratio is expressed as a percentage. At the outset, your LTV ratio will reflect how much money you put down as a down payment on your home. So, for instance, if you purchase a home which has a value of $250,000, put down $50,000, or 20%, you will have a LTV ratio of 80%, because $200,000 is the remaining loan balance, and $200,000 is 80% of $250,000. As you pay off your balance, your LTV will change; this will also happen if the value of your home changes, which can happen as the market fluctuates.

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