Demystifying the Many Acronyms of Mortgages

March 5, 2024

Though buying a home is exciting, for first-time buyers or those unfamiliar with the process, it can also be slightly confusing, especially when choosing the best mortgage product and signing documents filled with acronyms. To help you navigate the world of mortgage lending and make more informed decisions when buying a home, the experts at BayFirst have created the below “cheat sheet” with commonly used acronyms, which can be the key to getting your keys with peace of mind.
 
APR (Annual Percentage Rate)
Your Annual Percentage Rate represents how much it will cost you to borrow funds, expressed as a percentage.  This number include your simple interest rate and any finance related fees charged.
 
ARM (Adjustable-Rate Mortgage)
Unlike a fixed-rate mortgage, an ARM loan comes with an interest rate that can change periodically based on market conditions.
 
CD (Closing Disclosure):
You’ll receive the Closing Disclosure from your lender a few days before you officially close on your home. It compares your final costs and terms with your initial Loan Estimate.
 
CLTV (combined loan-to-value) ratio
Your CLTV is a measure comparing all secured loans (including the first mortgage, home equity lines of credit, home equity loans, and/or a second mortgage) to the actual value of the property. It’s expressed as a percentage and lenders use it to determine risk involved.
 
DPA (Down Payment Assistance)
Down Payment Assistance is a program available to homebuyers who do not have the funds for the required down payment. This assistance can come in the form of a low-interest loan, zero-interest loan, or a grant. The program can be offered by government entities like the state or county housing authorities or by private lenders, like a bank.
 
DTI (debt-to-income) ratio
Your Debt-to-Income ratio is the total amount of all your debt (including a mortgage) measured against your income. It is one of the most important numbers your lender will use to determine if you qualify for a loan.
 
FHA (Federal Housing Authority)
The Federal Housing Authority provides government-backed loans with lower down payment requirements and more flexible qualifying criteria than conventional loans. Because FHA borrowers can put as little as 3.5% of the purchase price down, these loans are a great option for first-time buyers and those with hardships in their financial history.
 
HELOC (Home Equity Line of Credit)
A Home Equity Line of Credit is a line of credit separate from your mortgage that allows you to borrow against the equity in your home. Like with a credit card, you draw money as you need it, rather than in a lump sum. Funds can be accessed any time but cannot exceed the amount originally set when the line of credit was approved.  Rates associated with HELOCs are typically adjustable, meaning they will likely change over time, but you will only pay interest on what you spend.
 
HELOAN (Home Equity Loan)
A home equity loan (sometimes referred to as a second mortgage) allows you to borrow a lump sum against your home’s equity for a fixed rate, meaning you’ll pay your loan back in fixed installments over a predetermined period of time.
 
HOA (Homeowners Association)
A homeowner’s association is the organization that creates and enforces rules for residents in a subdivision, planned community, or condo building. Having one comes with a fee that should be factored into your overall budget for the home.
 
HOI (Homeowner's Insurance)
Different from a home warranty and mortgage insurance (see PMI below), homeowner's insurance covers a property against loss or damage. Most lenders will require that you have a policy in place before closing.
 
LE (Loan Estimate)
A Loan Estimate outlines the terms, payment amounts, and any additional costs associated with your loan. Every lender uses the same disclosure, making it easier to compare offers from different lenders.
 
LTV (Loan-to-Value) Ratio
Different than CLTV, your loan-to-value ratio compares the amount owed on your mortgage with the amount the property is appraised for. Lenders use LTV to determine if your application is approved, and whether you'll need to pay PMI. When it comes to LTV, the lower the better.
 
P&I (Principal and Interest)
Principal and interest are the two main parts of your monthly mortgage payment. "Principal" refers to the amount you borrowed and must pay back, while "interest" refers to the interest the lender charges for lending you the money.
 
PMI (private mortgage insurance)
Private mortgage insurance is a type of insurance that many lenders require to protect themselves if a homebuyer does not pay the loan back. It is most commonly required on conventional loans where the buyer provides a downpayment totaling less than 20% of the total loan amount.
 
TIP (Total Interest Percentage)
TIP compares the total amount a borrower will pay on the loan with the actual amount they borrowed.
 
USDA (United States Department of Agriculture)
The housing service of the USDA offering fixed-rate mortgages to borrowers in rural areas. These loans typically come with favorable interest rates and zero down payment options. 
 
Ready to say Y-E-S to homeownership? Armed with these explanations, you’ll be better equipped to navigate conversations with lenders and real estate agents, understand your loan options, and make more informed decisions. Our team is still standing by to help you every step of the way. Get started here.