If you’re buying a home for the first time (or second or third), it’s important to become familiar with common mortgage terms before you buy a home.
These mortgage terms will help ensure you know what’s going on. The last thing you want is to get lost in the process because you don’t understand the language.
We’re here to help with that.
Let’s dive into the 13 mortgage terms you should know to be completely prepared to buy your home.
This is by no means a complete list of the terms you may run into during the home buying process. But by the end, you’ll be able to understand basic definitions you’ll come across in paperwork and conversations.
The lender is who you go to for your home loan, called a mortgage. Lenders can be banks, credit unions, and private individuals. They can lend for conventional, FHA, or other types of loans.
Pre-approval is the amount of money that the lender has determined they’re willing to lend you, based on your existing financials. Though not an official approval, pre-approval estimates how much the lender is willing to lend you.
Once pre-approved, you’ll receive a pre-approval letter that will show sellers that you have the funding to back up your offer.
The appraisal is a rough estimate of how much the house is worth. Lenders want to see an appraisal before they lend you money to ensure that they’re not spending too much on your house.
Closing costs are the fees you pay to finalize the loan. These include, but are not limited to:
- Loan origination fees
- Underwriting fees
- Inspection fees
- Appraisal fees
- Attorney fees
- Insurance prepayment
- Title insurance
- Property taxes
Typically, closing costs are 3-6% of your loan.
While not usually mandatory to close, home inspections are recommended. A home inspection is a professional walkthrough of the house in order to find any major issues before purchasing.
In this procedure, your inspector will look for any problems in the house such as termite damage, foundation problems, HVAC problems, and roofing problems for example.
Basically, your inspector should catch anything major that could be wrong with the house. If there are problems, you can often use this information to negotiate with the seller.
A mortgage is the money you borrow from the bank to buy a house. It’s the cost of the house minus the down payment. Sometimes you can include closing costs in your loan, depending on your lender. Your mortgage is what you’ll work towards paying off with your monthly payments.
A credit report pulls the debt that you have and collects it in one place. You’ll see all of your accounts due and if you have anything in collections. Your report is found at one of the three credit reporting bureaus: Experian, Equifax, and TransUnion. You’re entitled to one free report from each of the agencies per year.
Your credit score is an assigned number that determines your creditworthiness. It’s determined by the different credit accounts you have, what you owe on each account, and how old your credit is. Good credit scores are considered 700 and above. Most lenders and loan types will require a score of more than 580 to qualify. Anything else is average.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance is the insurance required when you have less than a 20% down payment on your property. When you put down less than 20%, banks need some assurance that you’re serious about your investment. The banks collect this insurance because they want to know that their investment will be protected. Unless it’s an FHA loan, the PMI will stop being collected once you have 20 percent in equity.
A down payment is the portion of your home’s purchase price that you pay upfront. Typically, you’ll want to put down at least 20% to avoid paying PMI. But most loans allow for much lower down payments to qualify. Most conventional loans require a minimum of 3-5% down. Talk to your lender about different loan options and the down payments they require.
You can use our mortgage rate calculator to see how your downpayment will affect your home’s monthly mortgage costs.
Annual Percentage Rate (APR)
Annual Percentage Rate (APR) is the amount of interest that you’re going to pay on your loan per year. If you have a 5% APR, you’ll pay 5% of your loan amount in interest every year.
Earnest Money Deposit
Earnest money deposit is the money that you pay the seller when you enter a purchase agreement. If the offer is rejected, the seller won’t cash your check. But it shows the seller that you’re serious about wanting to purchase the property. If the closing process continues without issue, the earnest money deposit is applied to your down payment and is usually 1 to 3% of the property.
Amortization is the schedule that your loan is being paid down. At first, you’ll pay more in interest than you will on the principal loan amount of your home. With each payment, you’ll start to see more money paid toward the principle of your home and less towards interest. The amortization schedule breaks down at which points this will begin.
At AAA Banking, we are committed to providing information to help you start your home ownership journey. We want to support you as you make the best decision for your family and your financial well-being. Get started today.
Photo by Mikhail Nilov