Home-Buying 101: 10 Words Every First-time Homeowner Needs to Know
January 18, 2021
Maybe you didn’t take that high school consumer ed class all that seriously, or grew up immersed in a completely different industry. How do people make sense of all the home-buying vocab terms? Here are 10 words you’ll want to make sure you know before you purchase (and move into) your new home:
- ARM: Adjustable Rate Mortgage
If you’re financing a portion of your home purchase, this indicates the interest rate is more fluid than a fixed rate mortgage. The “introductory period” could be a 3-, 5-, 7- or 10-year loan, and then the interest rate is adjusted by the lender based on current interest rates. Remember that although the initial interest rate is typically lower than a fixed-rate mortgage, once that period ends, the rate could climb dramatically. (So plan accordingly if you go this route.)
- Comps: Helping You Determine a Fair Price
Comparative home prices help realtors and home-sellers know how much their home is worth in a certain housing market, based on other comparable homes (with similar size and features) that have recently sold in the area. Looking at comps as a buyer can also help you determine what is a fair offer to the seller that makes your offer more appealing.
- Closing costs: Part of the Deal
On the final day you purchase your home, known as your closing day, you’ll pay for various fees that go along with the home-buying process, like the home appraisal, attorney fees, and title insurance. Your lender should help you by providing a good faith estimate (GFE) for these fees shortly after applying for a loan. Although you can’t avoid closing costs, ask your realtor about ways to negotiate or reduce them.
- Contingency: The Legal out-clause
Not all contracts carry a contingency clause, but most will. This is a part of the agreement that keeps it from being fully binding until certain conditions are met. i.e., the deal going through is contingent upon, or depending upon, certain criteria. Examples include the buyer’s contractual right to obtain a professional home inspection before purchasing the home, the right to be approved for a mortgage, or the right to first sell an existing home.
- Down Payment: Cash that initiates your deal
The down payment represents the total amount of cash you put toward your home purchase price. A traditional down payment is 20%, but there are down payment assistance programs available for first-time home buyers and veterans. Bear in mind if you put down less than 20%, you’ll be required to carry PMI, private mortgage insurance.
- Escrow: The in-between time
Generally speaking, escrow can mean two things — the time period from agreed-upon terms of the contract, or the actual escrow account which holds finances in place for a period of time until the closing day. When you write your home offer, you’ll want to include a certain amount of “earnest money” (think of it like a non-refundable deposit if all the agreed-upon terms are met) to help show that you’re sincere in working to finalize all details for the sale. For planning purposes, typically plan on 1 to 2% of the purchase price to go into escrow.
- Fixed Rate Mortgage:
A fixed-rate mortgage means your interest rate doesn’t change, even if you have a 30-year loan. If you do want to change the terms, you’ll need to refinance. At the same time, you’ll be protected against any potential or unforeseen rate hikes.
- MLS: Multiple Listing Service
The MLS is used by real estate brokers to collect and compile all the information about local homes for sale in a given area. A house that is “FSBO” (For Sale by Owner) might not be available on this service, but some can still be found on certain aggregate real estate websites like Zillow.com.
- Points:
Think of points as a portion of your loan that helps you legally buy your way to a lower interest rate. Typically, one point costs 1% of your loan (or $3,000 on a $300,000 mortgage), two points equal 2% ($6,000), and so on. However, the true discount for that point will vary with each lender, so review your options.
- Principal: the main part of your loan
The principal is the main part of your home loan. But your monthly payment also includes principal, interest, real estate taxes, homeowners’ insurance, and potential PMI. This is what you will work to pay off, monthly, over the course of the mortgage.
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