Home Buying Terms To Know

A lot goes into buying a home, including new words and terms that every homeowner should know, especially during the homebuying process.

Here is a guide to some basic homeownership terms you can familiarize yourself with before you start the homebuying process:

Lender

An individual, public or private group, or a financial institution (like a bank) that supplies funds or loans. Repayment will include any interest or fees.

Real Estate Agent

This is someone who has earned a real estate license. They will help you find a home within your budget and start the home buying process for you.

Mortgage

A mortgage is a type of loan that’s used to finance a property. Mortgages are “secured” loans. This means the borrower promises collateral to the lender if they stop making payments.

Mortgage Term

This is the length of time that the mortgage contract conditions, including interest rate, are fixed.

Fixed / Variable Mortgage Interest Rate

A fixed mortgage interest rate is a rate that is locked in and will not increase for the term of the mortgage. A variable mortgage interest rate can fluctuate based on market conditions.

Down Payment

This is the amount of cash you can pay towards the purchase of your new home. Down payments can vary up to 20 percent of the home price.

Equity

This is the difference between the potential price a home could be sold and the total debt registered against it.

Debt-to-Income Ratio

Determining this ratio will help you measure your ability to repay debt. You compare your monthly debt payments to your monthly income before taxes and put it into a percentage. A lot of mortgage lenders prefer your debt-to-income ratio (including your mortgage payment) to be no higher than 36 percent.

Appraisal

This is when a home inspection is carried out, and an estimate of the home’s value is set.

Loan-to-Value Ratio

The total amount of your mortgage compared to the home’s appraised value.

Closing

The last step of home buying, also called the settlement. You sign all the necessary documents to finalize the sale and take responsibility for the mortgage loan.

Closing Costs

When you agree on closing or settlement in the homeownership process, you also agree to the costs incurred when getting a mortgage. This might include attorney fees, preparation and title search fees, discount points, appraisal fees, title insurance, and credit report charges. Closing costs are typically 2 to 5 percent of your loan amount and are often paid upfront at closing or just before.

PITI

This is a commonly used acronym for principal, interest, taxes, and insurance. It is also called your monthly housing expenses. The expenses include your mortgage payment, a monthly portion of your real estate taxes, and a monthly portion of your homeowner’s insurance.

These are just a few of the homebuying terms you should know as you prepare for homeownership. These terms and phrases can seem daunting. However, once you start the process, these terms will all start to make more sense.