Buying a Home for the First Time?
To best know your options, learn the financial lingoBy StatePoint
Are you a first-time homebuyer? You may discover that one of the biggest obstacles in purchasing a home is understanding the financial phrasing associated with loans. Sometimes the terminology can seem like another language.
It’s important to know what key phrases mean so you can shop confidently and knowledgably. Here are some top terms you’ll hear, as explained by professionals at the Federal Home Loan Mortgage Corporation (Freddie Mac).
- Pre-approval letter. A letter from your lender telling you how much home you can afford and the maximum amount you are qualified to borrow. Having a pre-approval letter while shopping can help you move faster and with greater confidence in competitive markets.
- Appraisal. After you make an offer on a home, your lender will order an appraisal to get a professional opinion on its value. This is a necessary step in getting financing secured, as it validates the worth to you and your lender.
- Closing costs. In addition to a home’s price, a buyer must pay “closing costs” to complete the real estate transaction. This includes taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs. Closing costs are generally two to five percent of your home purchase price.
- Escrow. The holding of money or documents by a neutral third party before closing, escrow can also refer to an account held by the lender or servicer into which a homeowner pays taxes and insurance.
- Mortgage rate. The interest rate you pay to borrow money for your house. The lower, the better.
- Fixed-rate mortgages. A mortgage with an interest rate that doesn’t change during the term of the loan, and is typically 15 or 30 years.
- APR. This stands for annual percentage rate. It’s a broader measure of your cost for borrowing money and includes the interest rate, points, broker fees and other credit charges you’ll be required to pay. Because these costs are rolled in, the APR is usually higher than your interest rate.
- Credit score. A number generally ranging from 300 to 850 based on an analysis of your credit files. Your score plays a significant role as it helps lenders determine the likelihood that you’ll repay future debts. The higher your score, the better your credit is seen to be and the more options you will have, including lower interest rates.
- Private Mortgage Insurance (PMI). If you make a down payment of less than 20 percent on your conventional loan, your lender will require PMI. PMI serves as an added insurance policy protecting the lender if you’re unable to pay your mortgage, and it can be cancelled from your payment once you reach 20 percent equity in your home.