Learning how to buy a home will likely include some new jargon in your vocabulary. To stay on top of all of this fresh terminology, it’s important to understand the basics.
Here are a few starter terms you should keep in mind when diving into the homebuying process.
Banks and credit unions are constantly throwing out phrases like “manageable terms” and “terms that make sense.” But what exactly are they? Well, whenever you’re talking about loans, “terms” outline the maximum length at which both parties have agreed the loan will be repaid. When you hear phrases such as “30-year fixed term,” it essentially means that the loan will be locked in at a fixed interest rate with a suggested repayment plan of 30 years.
This one is fairly straightforward—your “rate” is the amount of interest you are paying on your mortgage. These can come in the form of fixed or adjustable rates, the former meaning that your rate stays the same for the duration of the loan repayment, while the latter means your rate can fluctuate depending on the market.
You’ve heard it over and over on real estate shows and sitcoms—but what does it mean to be “in escrow?” Essentially, this is an indicator that you’ve entrusted some secure collateral with a third party—or escrow agent—who will disburse this collateral on the closing date.
“Escrow” is a term you’ll likely continue hearing after closing, though. If you’re a first-time homebuyer, this may be your first time using an “escrow account.” This type of account provides a lender with a guarantee that your property tax and home insurance will be paid on time and in full by releasing funds when necessary. An escrow account allows you to make one monthly payment to cover your principal, interest, insurance and taxes.
When signing day arrives, the term “closing costs” will pop up often—these are the expenses, beyond the cost of purchasing the property, that typically are incurred during this type of transaction. They may include fees to your legal representation, fees for paperwork filing and recording fees charged by your title administrator. When you opt for a loan such as a First-Time Homebuyer Loan, for example, part or all of these costs may be covered through a gift in exchange for a slightly higher interest rate on the mortgage.
Keep in mind that these fees are highly transparent—lenders are legally required to provide you a loan estimate that outlines your closing costs within three days of applying for a home loan.