Welcome to our final installment of the investment terms series! We hope this has been useful for you, and we look forward to bringing you more great content soon.
Prime Rate: The short-term interest rate used by banks. The prime rate serves as the index in some adjustable rate mortgages and home equity lines of credit. You’ll see the prime rate mentioned in ads all the time.
- This number is invaluable; when the prime rate is rising, you can expect mortgage rates will eventually rise as well.
- Variables that influence the prime rate will usually affect the interest rates of new fixed mortgages. The prime rate is usually The Fed’s funds target rate + 3%. Many interest rates used by the bank are a function of the prime rate.
Principal: The amount of money borrowed or the amount that remains unpaid. When you get a home loan for $100,000, the principal is $100,000. The principal can also refer to that portion of a loan payment that is applied to the principal balance of the loan.
Private Mortgage Insurance (PMI): This is mortgage insurance provided by a private mortgage insurance company. PMIs insure lenders in the event that the borrower doesn’t pay. Most lenders generally require PMI for all loans where to loan-to-value (LTV) percentage is greater than 80%.
Qualifying Ratios: Lending institutions use several ratios to decide whether a borrower can qualify for a mortgage. The two ratios primarily used are the “top” or “front” ratio and the “back” or “bottom” ratio.
- The top ratio is a calculation of the borrower’s total monthly housing costs (mortgage payment, taxes, insurance, mortgage insurance, etc.) divided by monthly income.
- The bottom ratio includes housing costs and also all other monthly debt. These ratios are very important to lenders.
Thanks for reading! Now that you’re familiar with these investment terms, you can use your new knowledge to improve your financial situation by starting a regular investment program today. Reach out to us if you have any questions, and keep an eye out for our latest series to drop next week.