Terms First-time Homebuyers Should Know

Navigating real estate transactions can be difficult even for experienced homebuyers. If you are new to the game, you are in for a whirlwind of acronyms, obscure names and confusing terminology. Which terms are the most important? Let us break them down for you.

Adjustable-Rate Mortgage (ARM) – First-time homebuyers usually know what a mortgage is, but there are many different types. An adjustable-rate mortgage is a loan where the interest rate increases or decreases depending on market conditions. It’s easier to get approved for, but your monthly mortgage payments also will not be fixed and can vary from month to month.

Annual Percentage Rate (APR) –The APR is the annual cost of your loan including the interest mortgage insurance, points and credit costs.

Closing Costs – There are fees associated with the cost of transferring the title of a home from the seller to the buyer. These include everything from paying for points and property taxes to document preparation and attorney fees. The fees come due at closing and must be paid at that time. The good news is that they are typically 2 to 5 percent of your loan so you can plan in advance.

Down Payment – A down payment is the amount of your own money — not the lender’s — that you agree to pay when you buy your home. As a general rule you want to put 20 percent of the amount of your loan down. You can get a loan with less money down, but you might have to buy private mortgage insurance.

Earnest Money (EMD) – This is basically a deposit. It shows that you are serious about purchasing the home. The earnest money is held by a neutral third party and then used toward the down payment or closing costs.

Escrow – Escrow can be very confusing to first-time buyers. Escrow is both the time it takes to close on your home and an account held by a neutral third party. An escrow account holds your earnest money and keeps the homeowners from using it for their own purposes.

Fixed-rate Mortgage – If you don’t want your monthly mortgage payments to fluctuate, you want to get a fixed interest rate. This means that your monthly payments won’t rise and fall with market conditions.

Homeowners Association (HOA) – If you are thinking of purchasing a home in a master-planned community like Harvest Green, you will become part of an HOA. This non-profit is responsible for maintaining community amenities. Your HOA fees are your share of the costs.

Points – Simply put, points are pre-paid interest. One point equals 1 percent of the amount of your loan. If you are purchasing a $200,000 home and a lender is charging you three points, that is $6,000. To get a lower interest rate you could choose to pay points up front. The advantage is that it will lower your monthly payment over the life of your loan.

Pre-approval – The process of buying your home starts with the pre-approval. This is the amount a lender agrees to give you.

Principle – The amount you borrow from the lender without interest.

Private Mortgage Insurance (PMI) – A type of insurance that protects lenders against defaults. If you can’t put down 20 percent of the loan, a lender might require you to purchase this.