We know your finances don’t come with a user manual and can be overwhelming. Even if you aren’t a math master or up on the latest trends, it’s still helpful to understand the basics. Here are ten terms we think you should know when it comes to banking, credit and real estate.
A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk. It’s a prediction of your behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports. There are three major agencies that collect credit information and produce credit scores so yours may be different from what we use depending upon the agency. Sometimes referred to as a FICO® score, we take your credit score into consideration when both reviewing your application and determining the interest rate to offer you on an approved loan. Factors such as the below can influence your credit score:
● Your bill-paying history
● Any current unpaid debt
● The number and type of loan accounts you have
● How much of your available credit you are using
● Whether you have had a debt sent to collection, a foreclosure or a bankruptcy and how long ago it was
You can request your free credit report by going to annualcreditreport.com. This website has additional information on credit scores and is authorized by federal law.
This is the value of your assets, minus any liabilities you owe. It’s an important metric to gauge your financial health.
Amortized Loan Payment
This is a payment plan commonly associated with home loans. The borrower has equal payments over the interest rate period of the loan which satisfies the interest owed while paying down the amount borrowed.
Fixed Rate Mortgage
A fixed rate mortgage is a loan with a set interest rate for the entire term. The interest rate will not change over the lifetime of the loan and your interest and principal payments will remain the same each month.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is a loan with an interest rate which can increase or decrease over time based on a current market index and margin at set intervals. ARMs can have lower initial interest rates than fixed rate mortgages. Rural 1st offers ARMs with initial interest rate periods of 1, 3, 5, 7, 10 or 15 years resetting to a 1-yr adjustable loan with maturity terms up to 30 years.
Variable Rate Mortgage
A variable rate mortgage is a loan where the interest rate is not fixed and can fluctuate up or down and change as often as monthly. Your monthly payments can also fluctuate. These are typically used for construction loans. In many cases, the variable interest rate is lower than a fixed rate. During the construction period, the borrower benefits from a lower payment because of the lower interest rate.
Loan-to-Value Ratio (LTV)
Loan-to-Value (LTV) is the ratio between your loan amount and the total home price you are purchasing. For example, if you apply for an $85,000 loan to purchase a home that costs $100,000, your LTV Ratio is 85% ($85,000 / $100,000). In this example, the remaining $15,000 that’s needed to purchase the home would come from you, the buyer, in the form of a down payment. While the ratio can vary based on down payment amount and loan program, 85% is a common LTV Ratio for Rural 1st.
Escrow is an easy way to save for the property taxes and insurance on your home. If your mortgage requires escrow, then an escrow account will be set up. This account will collect a monthly portion of the funds necessary to pay your annual property taxes and homeowner’s insurance on the property.
Private Mortgage Insurance (PMI)
Rural 1st does not charge PMI on our loans. Other lenders may require PMI, if you take out a loan with a down payment of less than 20% of the purchase price. This insurance can increase the cost of your monthly mortgage payment.
Principal vs. Interest
Principal is the money you agreed to pay back, whereas interest is the cost of borrowing the principal. Typically, your payment will be applied first to interest due, and the rest will be applied to the principal balance of your loan.
Now that you have the basics down, reach out to one of our expert Rural 1st Loan Officers to learn more about making your rural living dreams come true.