Buying a home can be a complicated process, especially when you’re not familiar with the terminology often associated with real estate transactions. Our friends at Keeping Current Matters recently published an article defining some of the words you’re likely to come across, yet may not completely understand. We hope the following definitions will help make things a little less complicated.
Annual Percentage Rate (APR): The APR will include interest rate, points, broker fees and other credit charges a borrower is required to pay. Therefore, the APR is usually higher than your interest rate.
- Appraisal: A professional analysis used to estimate the value of the property. This is a necessary step in getting your financing secured as it validates the home’s worth to you and your lender.
- Closing Costs: The costs to complete the real estate transaction, such as points, taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other costs. Ask your lender for a complete list of closing costs.
- Credit Score: A number ranging from 300 to 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!
- Discount Points: A point equals 1 percent of your loan (one point on a $200,000 loan equals $2,000). You can pay points upfront to buy down your mortgage interest rate.
- Downpayment: This is a portion of the cost of your home that you pay upfront to secure the purchase of the property. Downpayments typically range from 3 to 20 percent of the purchase price of the home, although some zero-down programs are available.
- Escrow: Money or documents held by a neutral third party before closing are said to be held in escrow. It can also be an account held by the lender into which a homeowner pays money for taxes and insurance.
- Fixed-Rate Mortgages: A mortgage with an interest rate that does not change for the entire term of the loan.
- Home Inspection: A professional inspection of a home to determine the overall condition of the property. Typically, an inspection should include evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation and pest infestation.
- Mortgage Rate: The interest rate you pay to borrow money to buy your house. The lower the rate, the better.
- Pre-Approval Letter: This letter, provided by a mortgage lender, indicates that you qualify for a mortgage of a specific amount. It also shows a home seller that you’re a serious buyer.
- Private Mortgage Insurance (PMI): If you make a downpayment lower than 20 percent 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 it can be cancelled from your payment once you reach 20 percent equity in your home.
- Real Estate Professional: A well-trained individual who provides services and assistance related to buying and selling homes and property.
If at any time during your real estate transaction there’s something that you don’t quite understand, don’t ever hesitate to ask your Realtor for a thorough explanation.