Buying a home can be an exciting and rewarding journey, but it can also be overwhelming, especially if you’re not familiar with the jargon and terminology used in the real estate industry. As if buying a home wasn’t tricky enough—now more than ever—there are all kinds of terms you should be familiar with, as well.
Even though we should know certain terms, there’s no shame in a quick refresher of their definitions. With that disclaimer out of the way, here’s a super-basic level glossary for the first-time homebuyer—or for anyone simply trying to get their bearings in the housing market.
Mortgage
We told you, we’re covering the most basic of basics. A mortgage refers to a loan obtained from a financial institution, typically a bank, to finance the purchase of a property. The borrower (homebuyer) agrees to repay the loan over a specified period, often with interest.
Interest rate
The interest rate is the percentage charged by the lender on the mortgage loan. It affects the overall cost of borrowing and determines the monthly mortgage payments.
Interest rates right now remain alarmingly high. And as we explain here, steep mortgage rates are discouraging potential sellers (who don’t want to give up their own, lower mortgage rates), leading to lower supply and increased competition among buyers. Here’s what that means for you.
Fixed-rate mortgage vs. adjustable-rate mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire loan term, while an adjustable-rate mortgage (ARM) has an interest rate that can change periodically.
Mortgage points
Mortgage points are the fees a borrower pays in order to trim the interest rate on the loan. This practice is sometimes called “buying down the rate,” since it lowers the overall amount of interest a borrower pays over the mortgage term. In other words, you can think of mortgage points like prepaid interest.
Each point the borrower buys costs one percent of the mortgage amount. For example, if you take out a mortgage for $200,000, one point will cost you $2,000.
Amortization
Amortization is the process of paying off a mortgage over time through regular monthly payments. It includes both principal (the original loan amount) and interest.
Pre-approval
A mortgage pre-approval is a preliminary assessment by a lender of a homebuyer’s creditworthiness. It provides an estimate of the loan amount the buyer is eligible for, which helps streamline the home search process.
Lock-in period
This is the number of days during which a lender guarantees a borrower a specific interest rate and terms on a mortgage.
Down payment
The down payment is the initial upfront amount paid by the homebuyer when purchasing a property. It is usually a percentage of the property’s total value and is paid in cash at the time of closing.
Closing costs
Closing costs are various fees and expenses associated with the finalization of a real estate transaction. These costs may include appraisal fees, title insurance, attorney fees, and more. Homebuyers should budget for these additional expenses during the buying process.
Escrow
Escrow is a financial arrangement where a neutral third party holds funds and documents on behalf of the buyer and seller during the home buying process. This ensures that both parties fulfill their obligations before the transaction is completed.
Appraisal
An appraisal is an evaluation of the property’s value by a licensed appraiser. Lenders usually require an appraisal to ensure that the property’s fair market value aligns with the loan amount. Most sales contracts will include an appraisal contingency, which means that a buyer can walk away from a home purchase if the appraisal comes in lower than the agreed-upon price. (This is a very good idea for first-time home buyers.)
Market value
Market value is the basis for the “listing price” or the “asking price” of a home. This value is the meeting point of the highest price that a reasonable buyer would pay, and the lowest price a reasonable seller would accept.
Good faith estimate (GFE)
This document tells borrowers the approximate costs they’ll pay at or before closing, based on common local real estate practices. Your mortgage lender or mortgage broker must deliver the GFE to you within three days after accepting your mortgage loan application.
Home inspection
A home inspection is a thorough examination of a property’s condition by a professional inspector. It helps identify any potential issues or defects that may affect the property’s value or safety. Your dream home could come with a basement full of hidden costs, so a home inspection is crucial to avoid falling into a money pit.
Title
Title refers to legal ownership of a property. A title search is conducted to verify that the seller has the right to sell the property and that there are no liens or claims against it.
Contingency
A contingency is a condition included in the purchase offer that must be met for the sale to proceed. Common contingencies include home inspection, appraisal, and financing contingencies.
Equity
Equity is the difference between the property’s market value and the remaining mortgage balance. As homeowners make mortgage payments, they build equity in their property.
Private mortgage insurance (PMI)
Private mortgage insurance (PMI) is a monthly fee rolled into your mortgage payment that’s required if you make a down payment that’s less than 20%. It’s designed to protect the lender in case you’re unable to pay your mortgage.
Homeowners insurance
Mortgage insurance is often confused with homeowners insurance, but the two serve different purposes. Homeowners insurance protects you in case your property is damaged, while mortgage insurance helps secure a mortgage with a lower down payment.
FHA-insured loans
The Federal Housing Administration (FHA) is a federal agency in the Department of Housing and Urban Development (HUD) that provides mortgage insurance for residential mortgages and sets standards for construction and underwriting. Home mortgage loans insured by the Federal Housing Administration are referred to as “FHA or FHA-Insured Loans.” However, the FHA does not lend money or plan or construct housing.
Homeowners Association (HOA)
An HOA is an organization that sets and enforces rules for properties within a specific community or development. Homebuyers in such areas are typically required to pay HOA fees.
Armed with these essential terms, you’ll be better equipped to navigate the home buying process with confidence and understanding. Remember to do your research, seek professional advice when needed, and take your time in making this important decision. Buying your first home may seem like a daunting financial feat—make it less painful by avoiding these mistakes.
