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Important Terms

Home Equity

Equity is created when the value of your home increases and/or when you reduce the amount you owe on your home through your loan payments. If your home does not increase in value and you make interest-only payments, you are not building equity.  This may make it harder to refinance your mortgage. If the amount you owe on your home, along with the costs associated with selling it (such as the real estate sales commissions and closing costs) exceeds the sales price, you will not receive any cash when you sell, and will have to pay additional funds to your lender or to other parties when you pay off your mortgage.

Loan-to-Value (LTV)

A financial term used to express the ratio of your loan amount compared to the value of your home. For instance, if you wish to borrow $200,000 to purchase or refinance a home worth $230,000 then your LTV is 87%. Calculated as:

$200,000 / $230,000 = 87%

Lenders use the loan-to-value ratio as a measure of risk when qualifying you for a home mortgage. Depending on the loan-to-value and the loan type, you may be required to obtain mortgage insurance.

Mortgage Insurance

A form of additional insurance used to protect lenders from the possibility of you defaulting on your mortgage loan. The type and amount of mortgage insurance differs depending on your loan type and loan-to-value.

Debt-to-Income (DTI)

The debt-to-income is a ratio used by lenders to determine the likelihood of you being able to repay the loan. To determine this ratio, lenders compare your monthly payment obligations, including the new mortgage, to your monthly income.

Down Payment

A down payment refers to the initial upfront portion of the total loan amount, in cash, given at settlement.

Escrow Payments

The following amounts may be included in your monthly payment for the future disbursement of items such as, but not limited to, homeowner’s insurance, flood insurance, mortgage insurance and property taxes. On loans where monthly escrows are not collected, please be aware that the borrower is responsible for all tax and insurance payments. These costs can be substantial and need to be planned for in your budgeting process. When considering a mortgage loan, please ask about the escrow requirements.

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