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8 Real Estate Terms To Know Before You Buy

Published on Wednesday - July 09, 2014

1.) Debt-To-Income Ratio (DTI)

An individual’s debt-to-income ratio, otherwise known as DTI, plays an integral role in the approval process of buying a home. It is, for all intents and purposes, one of the most important factors when determining whether or not a prospective buyer is qualified to buy. This number quantifies a borrower’s ability to pay back debt, based on how much they make in a given month.

A person’s DTI is directly correlated to their monthly gross income (what they make before taxes are accounted for) that is already dedicated to previously established debts. In other words, it accounts for how much money they will have after all of their debt is paid off. Not surprisingly, the lower the DTI, the better chance someone has of qualifying for a mortgage, as they have demonstrated an ability to have enough funds to cover debts and additional expenses. For mortgage purposes, a target DTI of 36 percent or less is considered acceptable.

2.) Monthly Payment

The monthly payment on a mortgage loan is perhaps the easiest real estate jargon to comprehend. However, while the concept of a monthly payment is relatively simple, it is important enough to warrant your undivided attention. More often than not, a monthly payment represents nothing more than a debt that is collected on a scheduled date. Few people actually understand what the monthly payment is comprised of.

The monthly payment includes a portion of principal (the amount of money borrowed or the outstanding balance on a loan) and the resulting interest. This, of course, is common sense. Right? Not so fast. Few are aware that the monthly payment may also include amounts for the escrow of taxes and insurance. The addition of these fees needs to be accounted for, as they can significantly throw of any initial budgeting.

3.) Interest Rate

Your interest rate is the cost of borrowing money expressed as a percentage. For example, if you borrow money at a 4 percent fixed interest rate for a year, the interest charged will be 4 percent of the total amount borrowed. Your interest rate, along with the term and loan amount, determines the size of your monthly principal and interest payment. Accordingly, the higher the interest rate, the more you will pay each month on your mortgage loan.

4.) Fixed Rate Mortgage

A fixed rate mortgage, as its name suggests, represents a mortgage in which the rate is locked in. The rate is never subjected to fluctuations, meaning that the rate you agree upon is the rate you will have for the remainder of the loan. While this means the rate will never go up, it also means it never has the opportunity to drop. A fixed rate mortgage is particularly useful for budgeting purposes, as there will be no surprises down the road.

5.) Adjustable Rate Mortgages

An adjustable rate mortgage, more commonly referred to as an ARM, is quite simply another take on the average mortgage loan. While the interest rate on a fixed mortgage is not susceptible to fluctuations, adjustable rate mortgages are the opposite. ARMs will have the borrower pay a lower, fixed interest rate for a set period of time. However, once that time expires, the rate is subjected to the conditions of the housing market for the remainder of the term. Essentially, the interest rate on an ARM is directly correlated to the market in which it was founded. If the rates go up, so will the ARM. For example, a 5/1 ARM is fixed for the first five years, then adjusts every year thereafter. An adjustable rate mortgage may be a good choice if you’re confident that interest rates are likely to remain stable or go down in the future.

6.) Annual Percentage Rate (APR)

The total cost of borrowing money is represented as the APR. This includes certain closing costs, interest, finance charges and points and lasts the duration of the loan. As the name suggests, it is expressed as an annual rate. All lenders calculate the APR according to federal requirements and are required by law to provide the specific APR for your mortgage in the Truth in Lending disclosure.

7.) Points

A point is a fee equal to 1 percent of your loan amount. You may be able to pay points, depending on the mortgage option selected, to lower your interest rate — these also are referred to as discount points. Alternately, you may be able to select a higher interest rate and receive a credit against closing costs. These are known as rebate points. The longer you plan on staying in your home, the more likely you are to benefit from paying points. To determine if paying points is right for you, you should calculate how long it will take for the initial cost to equal the savings you’ll realize through the reduction in your monthly payments. This is sometimes called a “break-even point.”

8.) Amortization Schedule

This is a snapshot of how the interest and principal components of your loan change over time as payments are made. In the beginning, your interest component typically will exceed the principal repayment component. If you have a fixed rate mortgage, your monthly payment stays the same, but the portion of the payment that goes toward principal will increase over time. The interest portion of the payment is calculated on the scheduled amount owed each month.

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