13 Terms Every Home Buyer Should Know

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terms that home owners should know

I was recently contacted by Baruch at The Smart Investor and I gladly accepted his guest post proposal, enjoy!

Buying a house is a prevalent activity that most Americans undertake. However, being a usual undertaking does not make it any less complicated and it remains to be a major material purchase that adults in the U.S. will ever make.

 If you’re a soon-to-be homebuyer, you’d have to learn the process and in doing so, deal with diverse real estate terms that you will encounter along the way. Having a good grasp and understanding of these terms will help you communicate better with your broker and seller. It could also lessen the hiccups of homeownership during the search and purchase stage.

 We’ve provided this short primer to acquaint you with some of the terms you might run into:

1. Pre-approval vs. Pre-qualification 

With a mortgage pre-approval, the lender gives you an estimate of the amount you can borrow according to the result of their verification of your financial documents, employment and credit history. This is important to you as a homebuyer, especially in the competitive world of home-buying because it shows the seller that you qualify as a buyer. Although pre-approval is not an actual loan commitment, it provides you with an important advantage as you start the process. Pre-qualification on the other hand is the outcome of the lender’s initial assessment of your capacity to borrow as they have analyzed the basic information that you have provided to them.

2. Fixed-Rate vs Adjustable Rate Mortgage

Typically, you will encounter two types of conventional loans you can use to finance your home purchase. These are a fixed-rate mortgage or adjustable-rate mortgage.

Fixed-rate mortgages, as the name implies, have an interest rate that remains the same for the entire life of the loan. This assures you, as a homebuyer, that your mortgage payments will stay relatively stable for the term of the loan. In contrast, adjustable-rate mortgages have flexible interest rates that can go up or down, such that your monthly payments may change from time to time. Lenders usually start with a low introductory interest rate for a pre-determined period before moving on to a variable rate.

3. Amortization

For you to fully complete the purchase of your home, you have to pay off the whole principal balance and the corresponding interests on it.

Amortization means the regular loan repayments you should make over time as your lender will provide through a payment schedule. Normally, during the first years of your payment cycle, more money will go to interest payment and less to the principal. However, as you near the end of your schedule, the ratio reverses slowly so that your payments retire more of the principal and you pay less interest.

Re-amortization can happen should you decide to pay more money on your mortgage than what the lender regularly requires from you. This will help lessen the principal balance on your fixed-rate loan.

4. Closing costs

These are expenses and fees related to a real estate transaction that the buyer pays at the closing. These would include things like a loan origination fee, title insurance, survey, attorney’s fee, appraisal fee, home inspection fee, and credit report fees plus prepaid items such as the escrow deposits for the property taxes and homeowner’s insurance.

5. Home inspection

Admittedly, a buyer pays for a lot of expenses when buying a house, but the home inspection is one area he should not be cheap about. A newly-renovated home could be pleasing to the eye but as a buyer, you should be able to know if the contractors did the renovations correctly and will not bring problems when you are already living in the house. Home inspectors have the training and experience to check for leaks, cracks, electrical issues that could be a source of costly repairs much later. It is to your advantage that you have all relevant information before you close the sale. In case you discover some major issues, you may even be able to bring down the purchase price or compel the seller to fix them before the final payment.

6. Down payment

It is the usual practice that when you’re buying a home and financing it with a mortgage, your lender will require that you put down a certain amount upfront. Normally, this will range from 5% to 20% of the total price although if you have the money, you can go beyond this range. The remaining amount will be what the lender will cover through the mortgage.

7. Principal and Annual Percentage Rate (APR)

More than other figures, the APR is the one that gives you the real cost of your loan. When you do the math, the APR will be higher than the stated interest rate of the loan because it also includes the other fees and costs that come with your loan. When you understand APR, you can make a better comparison between mortgage loan packages, so you can choose the best one for you.

Your mortgage principal is the amount that you borrowed from your lender to purchase the house. Your mortgage agreement will require you to pay back this principal over a period of time together with whatever interest that accrues on this amount.

8. Title Insurance

You should be aware of the two types of title insurance. First is the Owner’s Title Insurance and the second is the Lender’s Title Insurance or also known as a Loan Policy. An Owner’s Policy is for the protection of the buyer should a covered title problem come up with the title that did not arise during the title search. The Owner’s Policy gives you and your heirs protection for as long as you have an interest in the property. Most lenders will ask for a Loan Policy when you take a loan from them.

9. FHA loan

This refers to a mortgage that you can get through the Federal Housing Administration which has less strict credit and down payment requirements compared to a conventional loan. This is a good fit for buyers with less-than-impressive credit who do not qualify for conventional financing. The catch? Buyers must also pay monthly mortgage insurance fees and a sizeable upfront premium.

10. Appraisal

A home appraisal is an honest and factual valuation of a home that a licensed professional gives. Lenders normally require appraisals because they do not want to lend the buyer more money than what the property is worth because, in a mortgage, the property becomes the security for the loan. This means that if you are not able to pay back your loan, the bank may resort to foreclosure and sell the property to recover their money.

11. Private mortgage insurance (PMI)

If you don’t put up the entire 20% of the home’s price as a down payment, some lenders will ask for this insurance to lessen their risk. You will usually pay this every month together with your monthly mortgage payment. Once you’ve reached a certain amount of equity in the home, you can request for the cancellation of this insurance.

12. Points

As you may have seen, there are many fees that the lender charges on the buyer or those coming from different third parties, such as a home inspector. Zillow, an online real estate database, closing costs can be up to two to five percent of the purchase price of your home. It may seem quite substantial, but it covers the many costs that come in closing the deal – from buying title insurance to paying for points, attorney’s fees and surveyor’s charges.

13. Contingency

You will find a clause in the contract that specifically sets the conditions when the parties can void the contract and where the seller should return the deposit to the buyer. The buyer and/or the seller can request to put in these criteria on the contract. Homebuyers will usually have 15 to 45 days after the contract’s agreement to secure a signed financing agreement from a lender. Contingencies will depend on the agreement of the two parties. So, as a buyer, if you think

you’ll be needing more time for an inspection or to get financing, you can include that in your offer.

The Smart Investor is a free online academy having guides and tools to help you make consumer spending decisions.