The homebuying process is full of acronyms and if you're unfamiliar with them, it can be hard to understand what you're agreeing to.
PMI, APR, LTV… say what? Don't stress when you hear acronyms you don't recognize – we're here to help! Let's get started with some of the most important acronyms and their definitions, so you can sound like a pro as you go through the homebuying process.
- APR (Annual Percentage Rate): The annual percentage rate tells you the annual cost of borrowing money based on the loan amount interest rate, and certain others fees. The APR is the bottom-line number you can use to shop and compare rates among lenders.
- FRM (Fixed-Rate Mortgage): A fixed-rate mortgage has an interest rate that does not change during the entire term of your loan. This is the most common type of mortgage, giving you certainty and stability over the life of the loan.
- ARM (Adjustable-Rate Mortgage): A adjustable-rate mortgage usually give you lower monthly payments at the onset, but over time your payments will change with interest rates. With this type of mortgage your interest rate adjusts after an initial period — typically 3, 5 or 7 years — and resets periodically.
- LTV (Loan-to-Value): The loan-to-value ratio divides the amount of money borrowed by the appraised value of the home and tells you how much of your home you own versus how much you owe on your mortgage. Lenders use it to help evaluate the risk and terms of your loan.
- DTI (Debt-to-Income): The debt-to-income is the percentage of your monthly income that goes toward your monthly debt payments. Lenders typically use this to measure your ability to manage monthly payments and repay debts.
- PMI (Private Mortgage Insurance): Private mortgage insurance is an insurance that protects lenders from losses if a homeowner is unable to pay their mortgage. It is required for homebuyers who make down payments that are less than 20% of the home purchase price. Typically, PMI will be incorporated into your monthly mortgage payment.
- P&I (Principal and Interest): Principal and interest are the portion of your monthly mortgage payment that goes toward paying off the money you borrowed to buy your home. For most homeowners your principal and interest make up the majority of your monthly mortgage payment — but not all of it.
- PITI (Principal, Interest, Taxes and Insurance): Together, principal, interest, taxes and insurance make up your total monthly mortgage payment. Calculating your total monthly payment, not just principal and interest, is an essential part of the loan approval process because it will give you a more accurate picture of the costs of homeownership.
- UPB (Unpaid Principal Balance): The unpaid principal balance is the amount of principal still owed on a loan. On a typical monthly mortgage payment, a portion of your payment is applied to the interest and a portion is applied to the principal. The following month's interest is based on your UPB. You can check how much how much of your payment is going towards your principal by looking at your amortization schedule.
- HOA (Homeowners Association): 20% of America's homeowners that live within a community governed by a Homeowners Association. If you are considering buying in one of these communities, it's important that you pay your fees as scheduled – typically monthly, quarterly, or annually. HOA fees vary from community to community and may cover services such as trash removal, lawn care and maintenance for common areas, pest control.
Words matter! Learn your homebuying lingo now so that when it's time buy a home you can talk with confidence about one of the most important investments you'll ever make. To learn more about the homebuying process visit My Home by Freddie Mac®.