There are many costs—even potentially unfamiliar terminology—associated with taking out a mortgage, including interest rate (the cost of borrowing), discount points (or just “points,” which are prepaid interest that can lower monthly payments) and fees (such as mortgage application and origination fees, closing costs and so on).
Buying and financing a home—especially your first home—can be confusing when you’re new to the mortgage process and all of the lingo that comes with it. Being able to recognize the acronyms below and knowing what they mean as well as how they affect your mortgage can make the experience less intimidating. Here are some common mortgage acronyms you might hear throughout your home financing journey.
APR – Annual Percentage Rate
Your annual percentage rate is different from your mortgage interest rate. While your interest rate is the cost you will pay to borrow money, your APR refers to the actual, annual cost of a loan to a borrower and is almost always higher than the interest rate. The APR includes any added costs related to what has been borrowed. By law, the APR is included in any loan agreement.
ARM – Adjustable-Rate Mortgage
Adjustable-rate mortgages have interest rates that are fixed for a specified term (3, 5, 7 or 10 years) and then adjust annually based on advances and declines in a pre-selected index in the major financial markets. (An example is LIBOR, a benchmark interest rate which is the rate at which major world banks lend to each other.) ARM’s have lower initial interest rates during the fixed initial term than fixed rate loans.
CD – Closing Disclosure
A CD (not to be confused with a Certificate of Deposit from your bank!) is required to be delivered to a borrower at least three business days (Monday-Saturday, excluding federal holidays) prior to closing and must contain all final costs for a borrower’s mortgage. This form is designed to provide disclosures that will be helpful to borrowers in understanding the costs related to their mortgage transaction.
DTI – Debt-to-Income
The relationship (or ratio) between an individual’s total debt payments to the income he or she earns. In other words, this is the percentage of one’s total income that is committed to all repayment of debt.
FHA – Federal Housing Administration
The FHA is the largest insurer of residential mortgages in the world. An FHA loan is often referred to as a “first-time homebuyer loan” because of the low down payment requirement. FHA loans have been helping first-time and repeat buyers become homeowners since 1934. The FHA also offers renovation loans.
FRM – Fixed Rate Mortgage
A fixed rate mortgage is exactly how it sounds. Your mortgage rate is fixed (and will not change) for the entirety of the loan duration, unless of course you choose to refinance.
LE – Loan Estimate
A loan estimate is a form designed to provide disclosures that will be helpful to borrowers in understanding certain features, costs and risks of the mortgage for which they have applied. A mortgage lender is required to deliver the LE within three business days (Monday-Friday, excluding federal holidays) after application.
LOX – Letter of Explanation
Your lender will ask you for various things throughout the application and underwriting process, one of them possibly being an LOX. For instance, let’s say you had a recent late payment on one of your credit accounts, a change in employment or had to buy a new car. Your lender will ask you to provide a short statement as to why that occurred. An LOX can be requested for anything ranging from rental history to income changes. Though an LOX can become a critical component in underwriting a loan, a brief, concise explanation usually is satisfactory.
LTV – Loan-to-Value
LTV is the relationship between the principal balance of the mortgage and the appraised value (or sales price, if lower) of the property. LTV compares the amount you borrow (or what you owe) for the mortgage with the value of the home.
PITI – Principal, Interest, Taxes and Insurance
“PITI” typically refers to your total monthly mortgage payment, including principal, interest, taxes and insurance. PITI can also include homeowner’s association fees, if applicable.
PMI – Private Mortgage Insurance
Private mortgage insurance is typically required for borrowers whose LTV ratio is less than 80 percent. PMI protects lenders in the case that borrowers default on their mortgage; but it is also beneficial for homebuyers, as it allows borrowers to purchase a home with a down payment of less than 20 percent.
TRID – TILA RESPA Integrated Disclosures
TRID is an acronym which is formed with two other acronyms. (Welcome to the world of mortgages!) TILA stands for the Truth in Lending Act, and RESPA signifies the Real Estate Settlement Procedures Act. In October of 2015, TRID—TILA-RESPA Integrated Disclosures—has been in effect. TRID is a set of guidelines provided by the Consumer Financial Protection Bureau (CFPB, an agency of the federal government). Sometimes called “Know Before You Owe,” TRID determines what information must be provided to borrowers from lenders and when it must be provided. TRID also establishes the fees that lenders can charge. The basic of objective of these (and other federal laws) is the protection of homebuyers, homeowners and renters from unfair lending practices and discrimination.
If you’re looking for more mortgage and homebuying knowledge, download our free Mortgage 101 Handbook for everything you need to know about buying your first home.