5 Real Estate Terms You Need to Know to Buy Your First Home
Buying a house for the first time can be overwhelming, especially when you’re hit with a whole new language of unfamiliar real estate terms that you don’t fully understand. It may be intimidating at first, but once you familiarize yourself with these five home buying phrases, you’ll feel more confident about deciding on a home that’s best for you. Once you’ve got the lingo down, all you have to worry about is whether you prefer a Craftsman-style home or a condo.
1. Fixed-Rate Mortgage
The most common type of mortgages are fixed-rate mortgages (FRMs). A FRM is a home loan with an interest rate that remains the same throughout the term of the loan, which can be anywhere from 10 to 30 years. Many buyers prefer this type of mortgage because it’s straightforward and predictable: You’ll know exactly what you’ll be paying each month for the life of your loan, regardless of market fluctuations. That peace of mind can be priceless.
Of course, the potential disadvantage of a FRM is that if interest rates drop, you may end up paying more than you would have if you were locked in at the lower rate. The only way to adjust your rate is to refinance, which can be costly. But generally speaking, if you plan to stay in your home for a long time, a FRM may be best for you.
Consider the differences between adustable-rate and fixed-rate mortgages to see which one is the best for you.
Photo Source: Flickr/Scott Lewis
2. Adjustable-Rate Mortgage
According to Bankrate, “an adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically.” This means that your monthly mortgage payments can increase or decrease as interest rates fluctuate. Most ARMs begin with a fixed rate for a period of time, which is typically five, seven, or 10 years. Once the fixed-rate period expires, your interest rate may increase or decrease once per year (based on the market). For example, a “5/1” ARM means that your rate will be fixed for the first five years and then adjusted annually.
The advantage of an ARM is that the initial interest rate and monthly payments are typically lower than those on a comparable fixed-rate mortgage. However, an ARM can be a good choice for buyers who plan to move before the fixed-rate period ends (and monthly payments potentially increase). But because interest rates are unpredictable, an ARM isn’t the best choice for everyone. You’ll want to run the numbers and make sure that if rates rise, you’ll be able to afford the higher monthly payments.
Escrow is a separate account held by a third party until all the conditions of the contract are met. It’s a way to protect the seller—who can see that you have the money and are ready to pay—and yourself (the buyer)—so you don’t end up purchasing a home that doesn’t pass inspection. Once all the paperwork is signed and you have the title or deed that indicates ownership of the home in your name, the funds in escrow are released to the seller.
4. Earnest Money
This term represents money you deposit into an escrow account upon entering into an agreement to buy. Typically, earnest money is 1 to 3% of the purchase price. It shows the seller that you have a genuine interest in purchasing. In other words, you are “earnest” about buying. If you back out of the agreement for some reason, the seller keeps the earnest money. Otherwise, it can go toward your down payment.
If all goes according to plan and the home is yours, you can put your earnest money toward your down payment on your new home.
Photo Source: Pixabay/Paul Brennan
5. Closing Costs
Closing costs are all of the fees associated with your home purchase and home loan at the closing (the final meeting between you and the seller when mortgage documents are signed and the title is transferred). Typically amounting to 2 to 5% of the purchase price, these costs may include appraisal fees, home inspection costs, loan processing costs, credit check fees, and escrow fees. Sometimes a seller may pay some of the closing costs, so be sure that all costs are accounted for in the paperwork so you know how much you’re responsible for.
Congratulations! Now, that you’ve read up on five of the most important real estate terms, you’re well on your way to becoming a home owner for the first time.
Featured Photo Source: Pixabay/Paul Brennan