If you’ve never purchased a home before, it can be pretty intimidating – especially when it comes to all the lingo. What the heck is an ARM (besides those things hanging off your torso)? What on earth are points? Knowing these terms is important; not only to keep you from looking foolish, but also to ensure you don’t end up making any major mistakes that could cost you in the long run.
So, without further ado, here’s your crash-course on the most important mortgage loan and real estate terms you should know.
We’ll start with the basics. A mortgage is a loan used to purchase a property. This is the total amount you finance and will make monthly payments toward for a specified term, such as 15 or 30 years. Keep in mind that there are many different options available to you when it comes to mortgages. Weighing those options with a mortgage advisor can help you pick the one that works best for you.
FIXED RATE VS. ADJUSTABLE RATE MORTGAGES
This is something that will be significant in your home buying decision as it will ultimately impact the amount you’ll be required to pay each month. A fixed rate mortgage has a set interest rate that stays the same throughout the life of the loan (i.e. 4.2% for 30 years). An adjustable rate mortgage (there’s that ARM we were talking about) – also known as a variable rate mortgage – has an interest rate that will fluctuate at specified intervals, such as 5, 7 or 10 years. That means your payments may go up at those intervals, so be aware.
The principal is the amount you borrow on your home loan. Interest is calculated on this amount. For a $300k mortgage, your initial principal would be $300k. A portion of your payment each month will go toward interest, taxes and fees and the rest will go toward paying off the principal. The more money you pay above and beyond your monthly payment amount, the more you’ll chip away at that principal.
A broker acts as a liaison between the bank or lending institution and the home buyer. These individuals can help you evaluate your financial situation and find the right funding to suit your needs. It’s important to keep in mind, however, that mortgage brokers don’t work for free. They typically get paid a fee for their services, which is why working with a direct mortgage lender like SnapFi can be a more sound financial decision. We can work with you from start to finish without the hassle of dealing with multiple parties and paying a bunch of exorbitant fees.
A pre-approval letter is a letter from the bank or lender that provides an estimate of how much they’d be willing to lend to you. This helps you determine how much house you can afford so you don’t end up bidding on a home that’s way out of your price range. It also assures the seller that you’ll be able to obtain funding should you reach an agreement. Tip: It can be helpful to work with a mortgage lender that also offers mortgage advisory services (like SnapFi) to help you figure out how much you can afford and how to best prepare financially.
Part of determining the appropriate amount for a home loan involves assessing the actual value of the property. Mortgage lenders typically require that an appraisal be performed prior to approving the loan application. The appraisal is based on a number of factors, including the condition of the property as well as other homes in the same area that have recently been sold. If the appraisal comes in lower than the offer you’ve made on the home, you might not be approved. After all, the lender doesn’t want to invest in a property that’s overpriced (and neither should you).
Once you’ve officially made an offer on a home, the next step is scheduling an inspection. The inspector will come in and examine every nook and cranny of the home, checking things like electrical wiring, plumbing, foundation, heating system and more. If the inspection reveals a problem, it can sometimes be used as leverage to negotiate a lower price. Inspectors typically charge around $500 – $800 for their services, so plan accordingly.
When you make an offer on a home, you are allowed to include certain conditions that must be met in order for the deal to go through. In mortgage and real estate lingo, these conditions are referred to as contingencies. There are also certain contingencies that are typically included in all mortgage deals, including getting a loan (financing contingency), a passed inspection (inspection contingency) and an appropriate appraisal amount (appraisal contingency).
The down payment is the amount of money you pay upfront towards the total value of the home. The remainder is then financed by your mortgage lender. Obviously, the higher the down payment, the lower your mortgage amount will be, which can also reduce the interest rate and payment amount. A typical down payment is 20% of the total home value. (Note: This isn’t set in stone. You can work with your mortgage lender to come up with an amount you can afford and are comfortable with.)
Keep in mind that buying a home involves a bunch of fees, and there’s really no way to get around that. Generally speaking, you will be required to pay a specified percentage of the purchase price (usually around 2-5%) at the time you sign the paperwork. These are known as closing costs, and they are separate from your down payment so be aware. Closing costs go toward things like loan processing fees, title insurance, excise tax, underwriting, etc.
Points are up-front fees on top of the down payment that can help you lower your loan interest rate. One point is equal to 1% of the total loan amount, so if the home you’re purchasing is $300k, one point would equal $3k. The more points you pay up-front, the more attractive your interest rate may be, but obviously the more money it will cost you out of pocket (in addition to all the other fees you’ll be on the hook for).
So, now that you’re up to speed on the lingo, the next step is finding that home of your dreams and making an offer. Thankfully, you don’t have to navigate these murky waters alone. We can help guide you every step of the way, from pre-approval to signing on the dotted line and getting the keys to your new place. Click here to get started!