Terms Every Home Buyer Should Know

Posted by Osgood Bank on May 9, 2024

Osgood Bank
Find me on:

Home Buying 11For most of us, buying a home is the biggest purchase we will ever make. One of the best ways to make your home buying journey more enjoyable is to understand common terminology you will encounter along the way.

Adjustable Rate Mortgage (ARM): A type of mortgage loan where interest rates can change over the term of the loan. In instances where an ARM includes numbers such as 5/1, the first number (5) is the number of years your initial interest rate will be fixed and the second number (1) is how often your rate will adjust after the initial period ends. The most common fixed periods are 3, 5, 7, and 10 years and 1 is the most common adjustment period. 

Amortization: The action of reducing or paying off a debt with regular payments. Your amortization schedule is your loan's repayment schedule broken into equal monthly installments.  

Annual Percentage Rate (APR): The yearly rate charged for a loan. The APR provides a consistent basis for presenting annual interest rate information and is the number that should be used to compare lenders. 

Appraisal: An estimate of a property's fair market value based on sales of comparable homes in the area.

Assessor: A person who determines the property's value for the purpose of taxation.

Balloon Loan/Mortgage: A mortgage that offers a low rate for a period of time before requiring a larger-than-usual, one-time payment, typically at the end of the loan term. 

Closing Costs: Fees paid at closing. The costs typically include origination fees, discount points, appraisal fee, survey, title insurance, and real-estate transfer taxes. 

Construction Loan: A short-term loan that provides funds to cover the cost of building or renovating a home. 

Conventional Loan: Any mortgage loan that is not insured or guaranteed by the government (FHA, USDA, VA).

Credit Report: A report that has information about the debts and payment history of an individual. This helps the lender determine the borrower's ability to repay a loan.

Debt-to-Income Ratio (DTI): The comparison of a borrower's monthly obligations to their income.

Down Payment: The amount paid towards the home in advance. The down payment is not included in the loan and the percentage a borrower is required to put down depends on the type of loan.

Earnest Money: A deposit the buyer pays to show they are serious about purchasing a home. These funds are held and if the sale is finalized, the earnest money may be applied to the closing costs or down payment. If the sale is not finalized, the money may  be returned to the buyer or forfeited to the seller, depending on the circumstance. 

Equity: The value of the property minus the a amount owed on the mortgage. 

Fixed-Rate Mortgage: A type of mortgage loan with an interest rate and term that do not change over the life of the loan. 

Foreclosure: The legal process through which the property is taken by the lender or servicer after the homeowner fails to make mortgage payments.

Home Equity Line of Credit (HELOC):  A line of credit that allows you to borrow against your home's equity. With a HELOC, you can use the funds, repay, and use them again throughout the life of the loan. 

Interest Rate: The cost you pay to borrow money. Unlike APR, the interest rate does not reflect any fees or other charges you may incur. 

Jumbo Loan: Each year, Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA) sets a maximum amount for loans they will buy from lenders. A loan that exceeds the limit is considered "jumbo". 

Loan-To-Value Ratio (LTV): A measure that compares the amount of a mortgage with the appraised value of the property. Lenders may use the LTV to determine if they will require the borrower to pay private mortgage insurance until the LTV reaches a predetermined ratio. 

Mortgage Insurance: A type of insurance that protects the lender against potential losses if the borrower falls behind on payment.

Pre-approval: The process of determining how much a borrower will qualify for to buy a home based on income, assets, and credit score.

Rate Cap: A limit that determines how much an interest rate can rise over the life of the loan.

Refinance: The process of taking out a new loan to pay off and replace an old loan. This is often done to take advantage of lower interest rates, to lower the mortgage payment, or to borrow additional money. 

Underwriting: The process of analyzing a loan application and verifying the data to determine the risk involved with funding the loan request. 


Subscribe for Good News

Get weekly articles delivered to your inbox.

Most Popular Articles