Like anything you do for the first time, you’re about to encounter a whole new vocabulary when you purchase a home.
Sure, you’ve likely heard some of these terms, but whether or not you know what they mean is an entirely different matter. We’ve broken down some of the most commonly confused terms you’ll encounter when pursuing a mortgage.
Closing costs are just what they sound like – the cost to close the purchase process.
These fees range from origination fees, notary fees, local taxes and others and some are negotiable.
Your lender will send you a form, known as a Loan Estimate, within three days of receiving your application. This form contains important information, including estimated closing costs. Use this form to compare this lender’s costs to other lenders when shopping for a mortgage.
Most first-time homebuyers understand that unless they’re paying cash for a home they will need a down payment. The confusion centers around who is making this requirement.
Hint: it’s not the home seller.
Indeed, this is a lender requirement and the amount you’ll need to pay varies according to the risk factor you present to the lender. USDA Rural Development and the Veterans Administration require no down payment for the loans they guarantee.
FHA offers low down payment options to certain borrowers.
You may also find that you qualify for municipal, state and federal down payment assistance programs. Work closely with your lender to find all the help you’re entitled to.
Think of “escrow” as a special type of account administered by a disinterested third party (typically an escrow officer) in which all the documents and monies pertaining to the real estate transaction are kept until closing.
Some of the items kept in an escrow account include the buyer’s earnest money deposit and the deed. There is also commonly a second escrow account in which the lender keeps your tax and insurance payments until they are due.
This is your monthly loan payment and it stands for what is included in your payment: principal, interest, taxes and insurance.
You may hear people refer to “buying down” their mortgage rate. What they are referring to is the payment of points, or percentage points of the loan amount.
If you plan on living in the home for a long time, paying a point up front will save you money.
You may hear this referred to as “collateral,” and the words mean the same thing but “security” is more often used in mortgage transactions. The home you are purchasing is the security for the loan.
In other words, if you go upside down in your mortgage payments, the lender reserves the right to take the security (your home).
Since the home is the security for the loan, the lender will want to ensure that nobody else has a claim on it.
A title insurance company will research the chain of title to make sure there are no liens or heirs that may pop up down the line with a claim to the title. The title insurance policy is a guarantee against this occurring.
We aren’t lenders, so if you’re confused about any mortgage terms, don’t be afraid to ask your lender for an explanation. Most are happy to help.