The process of buying a home can be drawn-out and confusing. From real estate lingo to technical documents, it’s often difficult to understand exactly what your real estate agent or lender is talking about. Even seasoned home buyers may not know all the different terms that come with buying a house.
Get yourself up to speed with these important home buying terms before you start shopping for your dream home.
Mortgage: A mortgage is simply a loan you get to pay for a home. Unlike other types of loans, such as a car loan, you’ll probably be paying a mortgage for anywhere from 15-30 years. The loan amount of a mortgage is also often much higher than most of the other loans you may take out.
Fixed-Rate Mortgage: This term means that your home loan’s interest rate is locked in for the duration of the loan. Most fixed-rate mortgages are in terms of 15 or 30 years. You can be confident that you won’t suddenly have your interest rate increased through the duration of your repayment.
Adjustable-Rate Mortgage: Unlike a fixed-rate mortgage, an adjustable-rate mortgage, or ARM, has a fluctuating interest rate. Usually, an ARM has a period of time at the beginning of the loan with a fixed rate, such as 5 years or 10 years. After this initial period, however, the interest rate is unlocked and changes to match the current market interest rates. If current rates increase, your mortgage payment will be higher. If they decrease, your payment will be lower. An ARM usually has a lower interest rate in the fixed period of the loan.
Loan Estimate: An official loan estimate (LE) is a document provided by your lender that gives you an estimate of your mortgage costs. It also shows you a breakdown of what each aspect of your mortgage costs, such as PMI and interest costs. This disclosure is sent to you after you have inquired about a mortgage but prior to closing on your home to make it easier to shop for a mortgage.
Down Payment: The amount of cash you plan to put towards the purchase price of your home. Some loan products require that you put at least 20% of the home’s sale price down, and finance the other 80% with a mortgage. Coming up with a large cash down payment is difficult for many buyers, especially first-time buyers. There are mortgage programs available for first-time buyers and other buyers that don’t require a 20% down payment.
Federal Housing Administration Loan: Commonly called an FHA loan, the Federal Housing Administration offers mortgages through approved lenders with lower down payment requirements. FHA loans are designated for low to moderate income borrowers since FHA loans require lower minimum down payments and credit scores than other loan programs.
Private Mortgage Insurance: Usually known as PMI, private mortgage insurance is an insurance policy taken out on your mortgage. This policy protects your lender in the event you can’t make mortgage payments and default on your loan. Most lenders require PMI if you cannot make a 20% or higher down payment. The monthly premium for PMI is added to your monthly mortgage payment as an additional expense. Once you have paid off 20% of your home, you can usually request that the PMI be dropped.
Preapproval Letter: A preapproval is a conditional agreement from a potential lender to lend you a certain amount of money at an estimated interest rate. The preapproval is made after you submit your financial information including income, debt and any assets you might have. The agreement is usually based on the condition that your finances won’t significantly change and the home appraisal. Real estate agents typically require a preapproval letter when you start shopping for a home so they can be included in an offer to a seller.
Appraisal: Usually completed by an independent appraiser, an appraisal is an educated estimate of your home’s value. An appraisal is often required by lenders. This helps lenders ensure they’re not loaning you more than the home is worth.
Closing Costs: These are the fees and other costs that occur when you secure a mortgage. Although closing costs range in value, you can generally expect to pay between 2%-5% of your home’s value. Closing costs could include attorney fees, title inspection and transfer fees, mortgage application fee and homeowners insurance costs.
Homeowners Insurance: It’s usually a smart choice to take out a homeowner insurance policy if you own a home. If you’re planning to get a mortgage, your lender is most likely going to require a homeowners policy. Homeowners insurance helps cover the cost of damages to your home and belongings if an accident should occur, such as a fire or theft. Your lender may suggest an insurance provider, but it’s usually a good idea to get a homeowners insurance quote from different insurance companies.
Escrow: Each month when you make your mortgage payment, you’re paying for more than the money you borrowed. Your payment also probably includes the cost of homeowners insurance and your property taxes. An escrow account is an account in which funds from your mortgage payments are placed. Your escrow account usually holds funds that your lender then uses to pay homeowners insurance premiums, property taxes and PMI.
Mortgage Points: Usually paid to your lender at closing, you can sometimes have the option to pay mortgage points which are used to lower or buy down the interest rate. One point is equal to 1% of your mortgage amount, so 1 point for a $100,000 loan could roughly cost $1,000. When you buy mortgage points, your lender can decrease your interest rate by a certain amount.