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5 Terms To Be Familiar With When Getting A Mortgage

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If you are about to start the process of applying for a mortgage, it's important that you understand all the terms that are being thrown at you for the first time. These terms will be frequently used, and not knowing them can lead to major confusion about your loan.  


Your loan payment is made up of principal and interest, with each payment being a mix of both. The interest is what the bank receives as profit for lending you the money, and the principal goes toward lowering the balance owed on the home.


Equity is the value of your home that you currently own, which has mainly been paid for through principal payments as part of your monthly payment. However, equity in a home can also increase as the home's market value goes up. Even though you haven't sold the home, it's considered equity since it is something that you can leverage for cash by either selling your home or refinancing. 


Amortization is essentially a way of referencing the process of paying a loan off over time through regular monthly payments. There will be an amortization schedule as well, which lists each payment that you'll need to make during the loan period. Each payment is then broken down on the schedule by showing how much of each payment is principal and interest. 

The amortization schedule starts with payments being primarily made out of interest and then is primarily principal near the end. This means that at the start of your loan, you are mainly paying interest. 


PMI stands for private mortgage insurance, which is a way that lenders can protect themselves from borrowers that they feel are high risk. Some loans will require that you pay PMI if you provide a small down payment to the lender, which is less than 20% in most cases. Be aware that some loans will require that you pay PMI for the life of the loan, and the only way that you can get rid of it is to refinance. Others allow you to get rid of PMI when you've reached 20% equity. 


LTV is the loan-to-value ratio. It is a calculation done by comparing your loan amount to the appraised value of the home. The amount that you paid for the home doesn't matter, since the lender is only concerned about how much the home is estimated to be worth when appraised. Some lenders will not approve a mortgage if you have a very high LTV, and you'd need to provide a larger down payment to be approved. 

Contact a local mortgage service, such as USA Mortgage-Volunteer Mortgage Group, to learn more.