So you have decided to purchase your first home, congrats! Buying a home is a major accomplishment that shouldn’t be taken lightly. Beforehand, we suggest that you familiarize yourself with these key home buying terms.
- Fixed-rate mortgage: If you have a fixed-rate mortgage, this means that your mortgage has a fixed interest rate for the entire term of the loan. The unique factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is created. The benefit of a fixed-rate mortgage is that the homeowner will not have to struggle with varying loan payment amounts that change with interest rate movements.
- Adjustable-rate mortgage: Also known as an ARM, this is essentially the opposite of a fixed-rate mortgage. You’ll have a fixed rate for several years, maybe five or 10, and then the interest rate adjusts according to the fully indexed interest rate, often the prime rate, which is what banks charge their most creditworthy customers. Your interest rate and payments will likely be lower in the beginning than those of the homeowner with the fixed-rate mortgage. But, as interest rates climb, so too will your own interest rate and monthly payments.
- Prequalified: If your lender tells you that you’re prequalified for a house, that’s a good start, but you’re still a long way from being a homeowner. Prequalification requires less documentation. It provides a general idea of the loan amount in which a home buyer might qualify. This way, you can start looking at homes and have a sense of what type of house you can afford. A preapproval is a much bigger deal. These require the submission of many more documents, such as pay stubs, bank statements and tax returns. Preapprovals are really for homeowners who are ready to commit to buying a house.
- Closing costs: These are fees related to buying a house that your lender charges you, or you rack up from various third parties, such as a home inspector. You can expect your closing costs to be 2 to 5 percent of the purchase price of your home. That may sound like a lot, but there are many costs involved in closing the deal, from buying title insurance to paying for points and attorney and surveyor fees.
- Escrow: This word can be used in a few different ways. For instance, you may have looked at a house, loved it, made an offer and offered a deposit. Which would then be put in escrow. That is, it’ll be put in a third-party account, probably set up by your real estate agent. This way you aren’t giving the homeowner your deposit, also sometimes called earnest money. Usually you can’t recoup these deposits if you back out of the contract, but if the seller decides to sell the home to somebody else, you most certainly would get your deposit back. The escrow account keeps your deposit safe so the homeowners don’t inadvertently spend your money and put you through the hassle of having to get them to repay you.
These are just a few of the terms you will hear throughout the home buying process. Do your homework ahead of time. Be prepared for this wonderful new adventure you are about to embark on. Be wishes and happy home buying!
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