You hear words like “escrow’’, “closing costs’’, and “mortgages’’ all the time – but if you are buying your first home, or even if it’s just been a while, you might not know exactly what they mean.
Here’s a guide for you to use if you are looking to buy a home and don’t want to ask your broker (see definition below) to have to define all the terms you need to know.
Annual Percentage Rate (APR): When you get a loan to buy a home, you will receive an APR number that is representative of what fees and costs you will pay with this specific loan over the course of a year. Different loans will have different rates, giving the buyer the opportunity to compare loan rates. This is not the same number as an interest rate – the APR takes the interest rate in to account, but also includes closing costs and other fees.
Broker / Realtor: A broker or realtor is the person that will help you find your apartment, condo, or home and will most likely receive a commission on the property you buy. A broker is someone who has more real estate education (they have to take a special exam in addition to holding a real estate license) and can hire real estate agents, to work for them.
Closing costs: After you decide to buy a home and get approved for a mortgage (see definition below), you will have to pay closing costs. This is a bundle of fees from the mortgage company, such as a credit report fee, appraisal fee, a pest inspection fee, and many others. Closing costs vary based on mortgage costs and type.
Down payment: This money is the percentage of the price of your new house that you are going to pay up front. Whatever you cannot pay in your down payment will be covered by your mortgage.
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Equity: Equity is the difference between the current value of your home and how much you have left to pay on your mortgage. Equity is increased when the value of your home increases over time (i.e., if the neighborhood improves or you build an addition).
Escrow: In the real estate world, people normally use the phrase, “in escrow,’’ which means the homebuyers have transferred money or other payments and documents to an impartial third party, such as an escrow agent or attorney who has nothing to gain or lose by your purchase, to hold on to until the buyer and the seller finish up final details. The escrow officer also makes sure that all parties involved in the home-buying process get paid and, in the end, they officially make the new home transfer into the buyer’s name.
Fixed rate mortgage / Adjustable rate mortgage: A fixed-rate is a mortgage that has an interest rate that stays the same throughout the course of your payments, while an adjustable-rate mortgage is one in which the interest rate changes over time depending on the wider economic market. Often with adjustable-rate mortgages, there is an initial rate (that can be very low), and then after a certain period of time the rate can begin to change month-to-month. You can’t predict what the fluctuation will be, making the adjustable-rate potentially risky in the end, even though it saves you money at the beginning. However, adjustable-rate mortgages do come with caps so your payments cannot go over a certain amount per month.
Home equity line of credit: If you have equity in your house, some lenders allow you to use it as credit to get secured financing (which normally has lower interest rates than other forms of credit), or to borrow from it. The interest on this loan might even be tax deductible.
Lease: Basically you can rent a home for a period of time before you then decide if you want to buy it. The rent you paid can go toward the purchase cost.
Mortgage / Loan: A mortgage is a type of loan specifically designed to help people purchase a home. Mortgages usually take somewhere between 15 and 30 years of monthly payments to pay off.
Mortgage broker: The job of a mortgage broker is to be the middleman between you as a homebuyer and the mortgage company lending you money. You do not have to use a broker, but they can be very helpful in finding new loans. You need to do your research before choosing one.
Pre-approval: This occurs before you as a homebuyer actually get a home loan, or maybe even before you have a specific home in mind. A lender can pre-approve you for a loan by writing a statement saying that, after a first look at your finances, it seems you would be qualified to borrow a certain amount of money.
Prime rate: Each individual bank determines their own prime rate, though many of them decide to use the federal prime rate. It is the base interest rate used when issuing loans. The Wall Street Journal calculates the prime rate every day based off the rate of corporate loans from 75 percent of the 30 largest banks in the United States. The prime rate is used to set the interest rate on home equity loans or adjustable-rate mortgages – or short-term loans.
Title: Having a title to a property just means you own it by law. You can title a home by yourself, with a partner, which means if one of the two people involved dies, the other one gets the property, or “in common,’’ which means two or more people have equal ownership in the home and can pass on those shares to whoever they want if they die.