Spelling Out Commonly Confusing Mortgage Acronyms

mortgage termsWhen you’re applying for a mortgage, there are so many terms that you’ll hear being thrown around in your lender’s office, and many can be confusing. We’ll try to shed some light on some of these mortgage acronyms:

GFE

GFE stands for Good Faith Estimate, which is a document that details the estimated costs associated with the loan.  This is the lender’s best estimate as to what the borrower will end up paying as a final cost.  This amount can change, though, depending on varying factors.

HUD

HUD stands for Department of Housing and Urban Development.  Lenders are required to document the actual cost of a loan when a mortgage closes on a HUD-1 form.

DTI

DTI stands for debt-to-income ratio, which is the calculation lenders use to determine how much you can afford to pay each month.  With this calculation, lenders divide the borrower’s monthly expenses by the borrower’s monthly income.  Generally, lenders don’t want borrowers to have a house payment that is more than twenty-eight percent of their income.

PMI

PMI stands for private mortgage insurance, which is what a borrower pays to protect the lender’s investment in the home when the borrower has less than 20% to put down on the home.

ARM

ARM stands for adjustable-rate mortgage, which is a loan that has changing interest rates.  An ARM usually has a lower rate than a fixed loan, but can change to be much higher than a fixed loan within a matter of months or years.

HELOC

HELOC stands for home equity line of credit, which is a line of credit that lets homeowners take out cash against their own home equity.  The limit of how much a homeowner can borrow is completely dependent on the loan-to-value ratio.

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