Frequently Asked Questions
What is a mortgage?
A mortgage is a loan used to purchase or refinance real estate, where the property itself serves as collateral. The borrower agrees to repay the loan — plus interest — over a set period (typically 15 or 30 years). If the borrower stops making payments, the lender can foreclose on the property.
What is the difference between APR and interest rate?
The interest rate is the cost of borrowing the principal loan amount. The APR (Annual Percentage Rate) is a broader measure that includes the interest rate plus other loan costs such as origination fees, mortgage points, and certain closing costs. APR gives you a more complete picture of the total cost of the loan.
What does mortgage pre-approval mean?
Pre-approval is a lender's written commitment to lend you up to a specified amount, based on a review of your income, assets, credit, and debts. It's stronger than pre-qualification and shows sellers you're a serious, qualified buyer. AFC offers same-day pre-approvals with no Social Security Number required to get started.
What is PMI (Private Mortgage Insurance)?
PMI is insurance that protects the lender — not you — if you default on your loan. It's typically required on Conventional loans when your down payment is less than 20% of the home's value. PMI is added to your monthly payment and can usually be removed once you reach 20% equity in the home.
What is an escrow account?
An escrow account is a separate account held by your lender where a portion of your monthly mortgage payment is deposited to cover property taxes and homeowner's insurance. When those bills come due, the lender pays them on your behalf. Escrow accounts help ensure these expenses are paid on time and spread the cost throughout the year.
What is debt-to-income (DTI) ratio?
DTI ratio is the percentage of your gross monthly income that goes toward monthly debt payments. Lenders use it to evaluate your ability to manage monthly payments. It's calculated by dividing total monthly debt (including the proposed mortgage payment) by gross monthly income. Most loan programs prefer a DTI of 43% or below, though some allow higher ratios.
What is loan-to-value (LTV) ratio?
LTV is the ratio of your loan amount to the appraised value of the property, expressed as a percentage. For example, a $200,000 loan on a $250,000 home has an 80% LTV. A lower LTV means more equity and less risk for the lender — which can result in better rates and the ability to avoid PMI.
What is amortization?
Amortization is the process of paying off your mortgage through regular monthly payments over the life of the loan. Each payment is split between interest and principal. Early in the loan, a larger share goes to interest; as time goes on, more goes toward paying down the principal. Your amortization schedule shows exactly how each payment is applied.
What's the difference between a fixed-rate and adjustable-rate mortgage?
A fixed-rate mortgage has the same interest rate and monthly payment for the life of the loan, providing predictability. An adjustable-rate mortgage (ARM) starts with a fixed rate for an initial period (e.g., 5 or 7 years), then adjusts periodically based on a market index. ARMs can offer lower initial rates but carry the risk of payment increases over time.
What are closing costs?
Closing costs are fees and expenses paid at the closing of a real estate transaction, in addition to the down payment. They typically range from 2–5% of the loan amount and can include origination fees, appraisal, title insurance, attorney fees, prepaid interest, and escrow deposits. Your lender is required to provide a Loan Estimate outlining expected closing costs early in the process.
