One of the first things I was taught as a mortgage professional was to not talk mortgagee talk. Mortgage finance is full of acronyms which may mean different things to different people. My goal, San Diego, is to slowly produce videos to help in understanding many terms. Below are five common misunderstandings in terms that may cause issues:
- APR vs. Interest Rate
One of the many changes over the past 15 years is the additional to APR to all marketing and offers that include an interest rate. It was supposed to level the playing field so that borrowers could easily compare mortgages.
The interest rate is what your monthly payments are based on. Loan amount, Term, Interest Rate = monthly payment.
APR (annual percentage rate) is a calculation of your interest charge from the loan’s closing costs and the effect of those interest payments until maturity. Basically you take you loan amount minus your 1st month’s interest and add all closing costs and this becomes your new APR loan amount (not real loan amount). Take your monthly payment using the above interest rate and amortize of the term using the APR loan amount, that’s how you get your APR, more or less.
Even trickier if you are comparing adjustable rate mortgages which uses future rates to compute APR, not very precise.
- PMI vs. MIP
PMI (private mortgage insurance) is what you pay to a lender to avoid loan failure on a conventional loan. If you put down less than 20% on your home, you will pay PMI until you meet 20% of your conventional loan. Rules for dropping the PMI can be tricky, consult your San Diego Mortgage Consultant at Greater Home Loans.
MIP (mortgage insurance premium) is the FHA mortgage insurance premium. This premium is paid in two ways: upfront (1.75% of the loan amount) and annually through monthly installments (which vary on down payment and is often adjusted for new loans annually). These funds are utilized to insure your loan.
The main difference between the two is that PMI is insured by a mortgage company whereas MIP goes to HUD, which is completely self-insured.
- 203K vs. 203B
These two loan programs are typically confused because they sound so similar. A 203B is a classic FHA loan program, whereas a 203K is an FHA Rehab Loan Program. As an example, you would take out a 203B loan if you wanted to purchase a house, whereas you would take out a 203K loan if you wanted to purchase a house and use part of the loan to renovate.
- DU Refi Plus vs. Open Access vs. HARP
These are all HARP programs for different Government Sponsored Entities. DU Refi Plus is the Fannie Mae HARP Program, Open Access is the Freddie Mac HARP Program and HARP is the generic term for the Home Affordable Refinance Program.
- Investment Property vs. Second Home
An investment property is a home that is used as a revenue source, very easily identified after reviewing your federal income taxes. Rates are typically higher for investment properties.
A second home is a little trickier. How far is it from your primary home? What is its purpose? Do you collect rents? A duck is a duck unless it mooos.