Every Term a Homebuyer Needs to Know for the First Time

Buying a home can be an exciting and rewarding journey, but it can also be overwhelming, especially if you’re unfamiliar with real estate jargon and terminology. As if buying a home wasn’t complicated enough – now more than ever – there are plenty of terms that you should also be familiar with.

Although we should be familiar with some terms, there is no shame in brushing up on their definitions quickly. After that disclaimer, here’s a super-basic glossary for first-time homebuyers or those just trying to navigate the housing market.

Mortgage

We told you that we cover the very basics. A mortgage refers to a loan received from a financial institution, usually 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 interest charged by the lender on the mortgage. It affects the overall cost of borrowing and determines the monthly mortgage payments.

Interest rates are now alarmingly high . And, as we explain here , high mortgage rates scare away potential sellers (who are unwilling to give up their own, lower mortgage rates), leading to lower supply and more competition among buyers. Here’s what it means for you .

Fixed Rate Mortgage vs Adjustable Rate Mortgage

A fixed rate mortgage has an interest rate that remains constant for the life of the loan, while an adjustable rate mortgage (ARM) has an interest rate that can change periodically.

Mortgage points

Mortgage points are a fee that a borrower pays to lower the interest rate on a loan. This practice is sometimes referred to as “buying at a reduced rate” because it lowers the total amount of interest the borrower pays over the life of the mortgage. In other words, you can think of mortgage scores as interest payments up front.

Each point that the borrower buys is worth one percent of the mortgage amount. For example, if you take out a $200,000 mortgage, one point will cost you $2,000.

Depreciation

Amortization is the process of paying off a mortgage over time through regular monthly payments. It includes both principal (original loan amount) and interest.

Pre-approval

Mortgage pre-approval is a preliminary assessment by the lender of the creditworthiness of the homebuyer. It gives an estimate of the loan amount a buyer is eligible for, which helps streamline the process of finding a home.

Blocking period

This is the number of days during which the lender guarantees the borrower a certain interest rate and terms on the mortgage.

Advance payment

Down payment is the initial down payment paid by the homebuyer when buying a property. This is usually a percentage of the total value of the property and is paid in cash at the time of closing.

Closing costs

Closing costs are the various fees and expenses associated with the completion of a real estate transaction. These costs may include appraisal fees, title insurance, legal fees, and more. Home buyers should consider these additional costs during the buying process.

Escrow

Escrow is a financial arrangement in which 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.

Grade

An appraisal is an appraisal of the value of a property by a licensed appraiser. Lenders usually require an appraisal to ensure that the fair market value of the property is in line with the amount of the loan. Most sales contracts include appraisal contingencies, meaning that the buyer can choose not to buy a home if the appraisal is below the agreed price. (This is a very good idea for first-time homebuyers.)

Market price

Market value is the basis for the “listing price” or “ask price” of a home. This value is the intersection point of the highest price a reasonable buyer would pay and the lowest price a reasonable seller would accept.

Good Faith Evaluation (GFE )

This document provides borrowers with an estimate of the cost they must pay at or before closing the deal, based on generally accepted local real estate practice. Your mortgage lender or mortgage broker must provide you with the GFE within three days of accepting your mortgage application.

home inspection

A home inspection is a thorough inspection of the condition of a property by a professional inspector. This helps identify any potential problems or defects that could affect the value or safety of the property. Your dream home may have a basement full of hidden costs, so checking the home is critical to avoid falling into a money hole .

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Title refers to the legal ownership of real estate. A title search is done to verify that the seller has the right to sell the property and that there are no liens or claims against him.

Unseen circumstances

A contingency is a condition included in a purchase offer that must be met in order for the sale to proceed. General contingencies include home inspections, appraisals, and contingencies.

Capital

Equity is the difference between the market value of the property and the remaining amount of the mortgage loan. As homeowners pay off their mortgages, they create capital in their property.

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is a monthly fee included in your mortgage payment that is required if you make a down payment of less than 20%. It is designed to protect the lender in case you are unable to pay off your mortgage.

Homeowners Insurance

Mortgage insurance is often confused with homeowners insurance, but they serve different purposes. Homeowner’s insurance will protect you if your property is damaged, and mortgage insurance will help you get a mortgage with a lower down payment.

FHA insured loans

The Federal Housing Administration (FHA) is a federal agency within the Department of Housing and Urban Development (HUD) that provides mortgage insurance for home mortgages and sets building and underwriting standards. Home mortgage loans that are 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 build housing.

Homeowners Association (HOA)

An HOA is an organization that sets and enforces rules for properties in a particular community or development. Homebuyers in these areas are usually required to pay HOA fees.

Armed with these important terms, you will be better equipped to navigate the home buying process with confidence and understanding. Remember to do your research, seek professional advice if necessary, and take your time in making this important decision. Buying your first home can seem like a daunting financial feat – make it less painful by avoiding these mistakes .