If you’re soon starting to take the plunge and move ahead into the field of real estate investing, you will encounter a few terms you may not initially recognize. Certainly the mortgage industry as Should You Form an LLC?whole has a range of acronyms that are rarely used outside of a real estate transaction. Here are just a few you will encounter.

 

Amortization. Amortization is the gradual reduction in the amount borrowed over time as monthly payments are made. Each monthly payment sends an amount to the bank in the form of interest and an amount to the outstanding loan balance.

Annual Percentage Rate. The annual percentage rate, or APR, is the cost of money borrowed expressed as an annual rate.

Debt Ratio. A debt ratio compares a borrower’s monthly credit obligations with the gross monthly income of all borrowers on the note.

DSCR. The debt service coverage ratio is found dividing the net operating income by the annual debt on the amount borrowed. If the DSCR is 1.20, the income from the unit covers 1.2 times the annual cost of the loan.

Escrow Holdback. An escrow holdback is an amount kept by a lender to pay for needed repairs or allowable upgrades in a purchase transaction.

Index. The index on an adjustable rate mortgage is the base rate used before adding the lender’s margin to arrive at the newly adjusted rate used to calculate the monthly payment until the next adjustment.

Margin. The margin is the amount added to the index used to calculate the monthly payment on an adjustable rate mortgage.

Net Operating Income. Net operating income, or NOI, is the annual income received from an income-producing property less annual operating expenses over the course of the year.

Origination Fee. Expressed as a percentage of the amount borrowed, this is lender fee used to cover the expenses of finding and approving a mortgage loan.

Point. A point, or “discount point,” is expressed as a percentage of the loan amount, a point reduces the interest rate on the loan.