10 Terms To Know If You’re A First-Time Home Buyer
Chances are, if this is your first home purchase, you’ve never before needed an escrow account, and you definitely don’t have PMI — but should you? Before you succumb to the whirlwind of unfamiliar words, read through this crash course of some ambiguous terms that you’ll need to know when you find the house of your dreams.
Chronologically speaking, this is one of the last things that you’ll need to worry about, but you’ll need to be financially prepared. What goes into closing costs can be a bit murkier than the name implies. The individual amount vary, but Realtor.com says your buyer closing costs should cover a loan origination fee, credit report, loan underwriter, home inspection and appraisal, title search (like a background check for your home’s ownership), survey fee, and taxes, often referred to as documentary stamps. Check SmartAsset’s handy calculator what your closing costs could add up to, but it’s typically 2% to 5% of the home’s value.
Also known as state stamps, documentary stamps are taxes on deeds. Stamp amounts and requirements differ by state.
Equity is what makes purchasing a home an investment — it means you have an ownership interest. Your equity is equal to your assets minus your liabilities. For homes, the owner’s equity is equal to the house’s market value — not necessarily what it was purchased for — minus any outstanding loans or liens against the property. With owning, equity helps you recoup some of your monthly costs, whereas with renting, you’ll never see that money again.
Simply put, escrow is money that a third party holds while a buyer and a seller negotiate a transaction. So, as the buyer, you would put money in escrow, or an escrow account, and it wouldn’t be released to the seller until the deal is final. Many mortgage lenders also require escrow accounts to hold monthly contributions to insurance or property taxes that would be released when the bills come due.
Although it sounds more like a character from a tabletop role-playing game than a financial label, the mortgagor is actually you, the borrower in a mortgage agreement. You are borrowing from the mortgagee, your lender.
You’re probably hearing deed and title thrown around seemingly interchangeably. But that’s far from the case. A title is the actual document that proves ownership of the property, while the deed is the document that transfers that title to you, the grantee, from the previous owner, the grantor.
Unlike most insurance policies, title insurance is a one-time payment that covers the history of a title rather than the future. A title search should turn up any liens, encumbrances, encroachments, or other events that could impact the validity of the title that will soon be yours, but if something surfaces unexpectedly while you’re the owner, title insurance can be a lifesaver. When you’re purchasing title insurance, you’re essentially paying for the peace of mind someone will defend you in court if the title is ever questioned and to compensate lost equity if the case doesn’t go your way.
Getting preapproved will make you a more attractive candidate to sellers, because you’re already guaranteed to have the money. For preapproval, you’ll fill out an actual mortgage application and submit to a financial background check that will grant you tentative approval for a maximum loan amount and give you an idea of your likely interest rate. If you’re just casually starting to look at homes but aren’t necessarily ready to buy, you could instead opt for a prequalification, which is an informal quote for what a bank or mortgage lender would be willing to loan you based on information you provide about your assets, debts, and income.
Short for private mortgage insurance, PMI essentially guarantees the lender’s money in the event that you’re unable to make your payments. Annually, it costs about 1% of the home’s value and is typically only required if you make a down payment of less than 20%, but it varies by lender.
While approaching a home loan, you and your lender could enter an agreement to lock in an interest rate based on current market conditions. During the finite period of the lock, if rates rise, you’ll still be able to enjoy the lower interest rates, but you’re likewise committed if rates start falling. Rate locks can be a bit risky for that reason and are often subject to deposits and fees to ensure both parties hold up their end of the deal.
These are only 10 out of dozens of highly specialized real estate terms, but it’s better to ease yourself in than to jump in cold. When in doubt, ask questions. It’s better to take the time to have your real estate agent explain the terminology to you than to agree to terms you didn’t understand.
Sam Radbil is a contributing member of the marketing and communications team at ABODO, an online apartment marketplace. ABODO Columbus apartments was founded in 2013 in Madison, Wisconsin.