Adjustable-rate mortgage, escrow, pre-qualification and pre-approval—buying a home is full of challenges, and expanding your vocabulary to include all of that confusing jargon is certainly one of them. While it may not be the most exciting step of buying a home, learning what these words mean is an incredibly important step in a successful buying experience—otherwise, you'll end up feeling pretty lost during showings and negotiations.
If you're buying a home, this is the top real estate terminology that you should add to your working vocabulary. Have a few questions about other terms? Just give us a call!
Adjustable-Rate Mortgage
When you're mortgage shopping you'll have a few options to choose from—and adjustable-rate mortgage is one of the main types. With adjustable-rate mortgage, you can expect your interests rates to fluctuate every month or year, going up or down based on specific market conditions. Most of the time, ARMs have a cap of some sort to prevent them from reaching dramatically high levels.
Annual Percentage Rate
Cars, homes, big-ticket items—APR is a necessary part of all loans. Basically, it's just a fancy way of calculating the annual cost of borrowing. To find your APR, a lender will take your average compound interest rate over the term of the loan. They are then required to disclose the APR to the buyer. This will help you get a better idea of which lender offers the best rates.
Appraisal
Before you purchase a home, your lender is going to want to know exactly how much the property is worth. A professional appraiser will evaluate the condition of the home and compare it with recent sales, then return with a set value. If the number isn't high enough to meet the loan amount, your lender might back out.
Closing Costs
Closing costs isn't a confusing term—instead, it's what they include that's tricky. When you close on your home, you should expect to pay fees from the property tax, title transfer, credit check, deed filing, inspection, attorney and lender, and more. If you're planning out your budget and worried you might've missed something in calculating closing fees, just give us a call, and we'll outline what you need to know.
Contingency
Sometimes, a buyer or seller includes special terms in the contract that the sale will be reliant upon. It might be that certain repairs are made before closing, or that the seller won't close until they've found another home to move to. If you have to deal with contingencies, they can get a little confusing, so it's good to have someone advocating on your side during the process.
Earnest Money Deposit
If you've ever made a security deposit on an apartment, then think of earnest money as the home-buying equivalent. Essentially, it's a small amount of money—anywhere from $500 to several thousand dollars—that you pay the seller to show that your offer is serious. Once the sale goes through, this money will be applied to your down payment. If something happens and the sale is cancelled, the seller will keep this money.
Escrow
During the home-buying process, there are several instances where escrow comes into play. First, when you send in your earnest money, it'll be held in escrow until closing—meaning both you and the seller won't have access to it. Your lender will also hold money in escrow, which will be collected monthly along with your loan payment and used to cover things like homeowner's insurance and property tax.
Fixed-Rate Mortgage
In contrast to an adjustable-rate mortgage, a fixed-rate mortgage doesn't have fluctuating rates—just one, permanent rate that's established when you get your loan. Fixed-rate mortgages are typically a little higher in interest than adjustable-rate, but they're predictable and stable, which makes them a popular pick for buyers.
Pre-qualification & pre-approval
Pre-qualification and pre-approval are similar, but not the same, and will help you get a better idea of how much you can afford to spend on a home. Pre-qualification is the first step, where a bank or lender will thoroughly review your finances and give you an estimate of what you can borrow. It's not as convincing to sellers as pre-approval, but still gives some weight to your offer. Pre-approval is a little more intense and requires you to complete a full mortgage application—which can sometimes cost several hundred dollars. Once the application and paperwork have been processed, you'll receive the exact amount you can borrow.
Private Mortgage Insurance
If possible, you'll want to cover 20% of your home's total cost with your down payment, but if you can't come up with the money, you'll have to pay private mortgage insurance. PMI is required by lenders as a way of protecting their interests in case you default on your loan. A monthly premium will be added to your mortgage payments, and you'll have to pay it until you've covered at least 80% of the home's original value.