Many people who plan to buy a new home are unaware of some of the popularly used home loan jargons. It is of course not a rocket science; you can educate yourself on these terms if you invest some time and if you have the interest to learn.
Here are 4 important home loan jargons that you must know.
1) Loan to Value Ratio or LVR: The Loan to Value Ratio determines whether you will pay the mortgage insurance or not. In order to avoid paying the mortgage insurance, you must have an LVR of eighty percent or lesser. If you have a ten percent deposit then your LVR is ninety percent. If you have saved a twenty percent deposit then you have done well and the LVR for your loan will be eighty percent, and you could avoid paying mortgage insurance.
2) Cash Out: Cash out means re-financing the loan wherein the borrower will take out money on his own home. If a home is appraised at hundred thousand dollars and the outstanding mortgage loan of the borrower is seventy thousand dollars, it is quite possible to enter into eighty percent cash out refinance transaction for a loan of eighty thousand dollars. The new mortgage of eighty thousand dollars can pay off the seventy thousand dollar loan and leave ten thousand cash out to the borrowers.
3) Lenders Mortgage Insurance or LMI: The bank holds this insurance policy against your loan for protecting themselves; however, the premium has to be paid by you. The premium is calculated based on what the LVR might be and the amount of the loan.
4) Servicing: Servicing means from which you are able to meet the loan repayment obligations based on your income and living expenses. When a lender gives you money, they would want to see if you can repay the loan comfortably without any problem. It is also the requirement of ASIC that finance providers and mortgage brokers make a lot of reasonable enquiries about the borrower’s living expenses in order to confirm that a potential loan will not cause financial trouble to the borrower.
These are just 4 of the most common jargons that are used by banks. You must be aware of all the jargons that are used before you take a home loan as it will make your job easy. Moreover, learning something new is always a good thing and can enhance your knowledge.