Buying a Home? Do You Know the Lingo?

Buying a home can be intimidating if you are not familiar with the terms used during the process. To start you on your path with confidence, we have compiled a list of some of the most common terms used when buying a home.

Freddie Mac has compiled a more exhaustive glossary of terms in their “My Home” section of their website.

Annual Percentage Rate (APR) – This is a broader measure of your cost for borrowing money. The APR includes the interest rate, points, and other loan fees along with other credit charges a borrower is required to pay. Your Mortgage Loan Officer is required by Federal Regulations to provide you with the APR as it is the overall cost of the loan.  It is the Interest Rate for your mortgage along with all of the one-time fees, calculated over your term of your loan in the form of an Interest rate which represents your overall cost of borrowing.  The APR is usually higher than your interest rate.

Appraisal – A professional analysis used to estimate the value of the property. This includes examples of sales of similar properties. This is a necessary step in getting your financing secured as it validates the home’s worth to you and your lender.  Appraisers will also view the home and will address any “safety” issues that may affect the lend-ability of the home.

Closing Costs – The costs to complete the real estate transaction. These costs are in addition to the price of the home and are paid at closing. They include points (if applicable), taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs. Your Lender should review these costs with you during the planning stage of your home purchase.

Credit Score – A number ranging from 300-850, that is based on an analysis of your credit history. Your credit score plays a significant role when securing a mortgage as it helps lenders determine the likelihood that you’ll repay future debts. The higher your score, the better, but many buyers believe they need at least a 780 score to qualify when, in actuality, over 55% of approved loans had a score below 750.

Discount Points – A point equals 1% of your loan (1 point on a $200,000 loan = $2,000). You can pay points to buy down your mortgage interest rate. It’s essentially an upfront interest payment to lock in a lower rate for your mortgage.  Good news (and be sure to check with your Tax Advisor), discount points are tax-deductible.

Down Payment – This is a portion of the cost of your home that you pay upfront to secure the purchase of the property. Down payments are typically 3 to 20% of the purchase price of the home. There are zero-down programs available through VA loans for Veterans, as well as USDA loans for rural areas of the country. Eighty percent of first-time buyers put less than 20% down last month.  And Down Payment Assistance programs have helped many homeowners with the purchase of their home.  Your Home Loan Officer should be able to let you know what is available in your community.

Escrow – The holding of money or documents by a neutral third party before closing.  When you make an offer on a home, you provide an earnest deposit.  If your offer is accepted, then this earnest deposit opens escrow.  (This articles is written for buyers in Arizona and California.  Other states may use Attorneys instead of escrows.)  Escrow is the 3rd party that ensures that all parties receive the monies due to them and creates the Final Settlement Statements on a closed transaction.

Escrow is a term that can also be used by Mortgage Servicers.  When you make your monthly payment to your Mortgage Lender and you have your Property Taxes and Home Owners Insurance collected each month, then this escrow is used to hold those funds until those future debts are due.  It is a great way for new homeowners to ensure that they have these expenses managed.  Normally, if you do not invest at least 20% into your new home, this type of escrow otherwise known as “impounding” will be required by your lender.

Fixed-Rate Mortgages – A mortgage with an interest rate that does not change for the entire term of the loan. Fixed-rate mortgages are typically 15, 20 or 30 years.

Home Inspection – A professional inspection of a home to determine the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation and pest infestation.  Your Real Estate Professional (if you are using one) will review this report with you, the buyer, and together you will decide if you will request the seller of the home to make any necessary repairs.  Note:  this is a negotiation process and it is not a guarantee that the seller will agree to your list of repairs.

Mortgage Rate – The interest rate you pay to borrow money to buy your house. The lower the rate, the better. Interest rates for a 30-year fixed rate mortgage are still historically low.  During your planning stage of the home-buying process, you should have an idea of where interest rates are at.

Pre-Approval Letter – A letter from a mortgage lender indicating that you qualify for a mortgage of a specific amount. It also shows a home seller that you’re a serious buyer. Having a pre-approval letter in hand while shopping for homes can help you move faster, and with greater confidence, in competitive markets.  Ask your Lender if they are participating with the Protect Your Transaction service.  This service takes the Pre-Approval to the next level.

Primary Mortgage Insurance (PMI) – If you make a down payment lower than 20% on your conventional loan, your lender will require PMI.   PMI serves as an added insurance policy that protects the lender if you are unable to pay your mortgage and can be cancelled from your payment once you reach 20% equity in your home.  Depending on the type of loan you obtain, your down payment along with your credit score will determine your PMI rate.  For Conventional Home Loans, PMI can be removed once you reach a 20% ownership in your home.  For FHA, the PMI is on for home loan for a lot longer, depending on your down payment.  Be sure to obtain all of the facts from your Lender.

Real Estate Professional – An individual who provides services in buying and selling homes. Real estate professionals are there to help you through the confusing paperwork, to help you find your dream home, to negotiate any of the details that come up, and to help make sure that you know exactly what’s going on in the housing market. Real estate professionals can refer you to local lenders or mortgage brokers along with other specialists that you will need throughout the home-buying process.  As a buyer, you do not pay for the REALTOR’s service, so they are a valuable asset to you during the home-buying process.

The best way to ensure that your home-buying process is a confident one is to choose your home-buying team, which includes a real estate professional who will guide you through every aspect of the transaction with ‘the heart of a teacher,’and who puts your family’s needs first along with a Home Loan Officer, that will educate you on your financial choices and ensure that you have an advocate throughout the mortgage process.

Karen Jones is a Licensed Mortgage Loan Officer (NMLS 307015) serving Arizona and California.   As a Banker of over 39 years, she is dedicated in ensuring that her clients are well educated and prepared for their new home purchase.

AmeriFirst Financial, Inc., 1550 E. McKellips Road, Suite 117, Mesa, AZ  85203 (NMLS # 145368). 1-877-276-1974. Copyright 2018. All Rights Reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions and limitations apply. Click Here for Licensing Information. The services provided by Karen Jones are not a condition, nor do they create any obligation for any form of remuneration for any real estate settlement service related to any referral.  The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Karen Jones does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Karen Jones will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.