Buying a home is an exciting milestone in life, but it can also be overwhelming, especially for first-time buyers. One of the most confusing aspects of the home buying process is understanding mortgage jargon. From APR to PMI, the terminology can be confusing and intimidating. To help alleviate some of the confusion, we have compiled a glossary of common mortgage terms to help first-time buyers decode the language of home financing.
APR (Annual Percentage Rate): The APR is the total cost of a mortgage loan expressed as a yearly rate. It includes the interest rate, points, fees, and other charges associated with the loan, giving borrowers a more accurate picture of the total cost of borrowing.
Closing Costs: Closing costs are the fees associated with closing a real estate transaction. These costs can include appraisal fees, title insurance, attorney fees, and loan origination fees. It is important for buyers to budget for these costs in addition to their down payment.
Down Payment: The down payment is the initial payment made by the buyer when purchasing a home. It is typically a percentage of the purchase price, with most lenders requiring a down payment of at least 3-20% of the home’s value.
Escrow: Escrow is a third party account where funds are held until all conditions of a real estate transaction are met. This can include the down payment, closing costs, and property taxes.
PMI (Private Mortgage Insurance): PMI is insurance that protects the lender in case the borrower defaults on the loan. It is typically required for borrowers who put down less than 20% of the home’s purchase price.
Pre-approval: A pre-approval is a lender’s conditional commitment to lend a specific amount of money to a borrower. It is based on the borrower’s creditworthiness and financial information and can give buyers a competitive edge in the home buying process.
Principal: The principal is the amount of money borrowed to purchase a home. It does not include interest or fees.
Refinance: Refinancing is the process of replacing an existing mortgage with a new loan, typically to take advantage of lower interest rates or to change the loan terms.
Underwriting: Underwriting is the process by which a lender evaluates a borrower’s creditworthiness and ability to repay a loan. It includes reviewing financial documents, credit history, and other factors to determine if the borrower qualifies for a mortgage.
These are just a few of the many terms that first-time buyers may encounter when navigating the mortgage process. By familiarizing themselves with these terms and seeking guidance from a knowledgeable lender or real estate agent, buyers can increase their confidence and understanding of the home buying process. With a bit of research and support, first-time buyers can successfully navigate the world of mortgage jargon and secure the home of their dreams.
