A lot of people get to the point in life where they want to jump into the real estate market. But unfortunately, getting your head around the linguistic landscape can be a challenge. There are so many terms that people in the industry use daily, and it can make your head spin.
In this article, we break it all down for you. By the end of it, you should have a pretty good understanding of what your mortgage broker means when they talk about the loan-to-income ratio or downpayment on your property.
Here’s everything you need to know:
Adjustable-Rate Mortgages (ARM)
When you pick a mortgage, your financial advisor will ask you whether you want to go fixed or adjustable. Fixed-rate mortgages keep the interest the same for a specified period – usually five years – whereas ARMs allow the rate to change month to month, depending on what happens to the interest rate.
The majority of people prefer the safety of fixed-rate mortgages. But there are a few who choose adjustable because they are usually considerably cheaper (at least in the short-run).
Loan-To-Income Ratio
What the heck is a loan to income ratio?
The answer is simple. It’s the number you get when you divide the loan’s value by your annual household income.
For instance, let’s say that your family earns $100k per year and that the mortgage you want to take out is $300k. In that case, the LTV ratio would be 3 – or three times annual earnings.
Debt-to-Income Ratio
If you go to services, such as Christensen Financial, they’ll usually talk to you about your debt-to-income ratio.
Just as before, this metric is a fraction, with the money you owe in the numerator and the total amount you made in the year in the denominator. Lenders use the resulting figure to work out whether you can take on a mortgage at all, and, if so, how much. They know from experience that people with high debt-to-income ratios are much more likely to default, making them less attractive as borrowers.
Earnest Money Deposit
Sometimes brokers will use the term “earnest money deposit” to describe money that buyers put down on the house to indicate that they’re serious about buying it. Usually, the earnest money deposit is around 2 percent of the property’s value, but it can range anywhere from 1 to 5 percent, depending on the nature of the sale.
Equity
Equity is a word you’ll hear a lot when you speak with financial advisors and bankers about your move.
Equity refers to the proportion of your property that is yours and usually builds over time. The fewer liabilities you own, the more assets you have.
Hard Money Loan
Sometimes, people use the phrase hard money loan to describe borrowing for homes that doesn’t come through the usual channels. Often, people with excellent credit scores are able to take out non-traditional loans that aren’t mortgages, especially if they are already known in the sector for their various property investments.