ARM. PMI. APR. HOA. Home buying has its own vocabulary with acronyms and terms you aren’t likely to hear in everyday conversation. If you are buying your first home, not knowing the lingo can be nerve-wracking. To help you crack the code, we’ve put together a list of the terms you will hear the most.
Adjustable-rate Mortgage (ARM) – This is a mortgage option where the interest rate is not fixed for the life of the loan. Instead, it is fixed for an initial period (typically five, seven or 10 years) after which the rates adjust to reflect market conditions for the remaining years of your loan. In other words, your interest rate can go up, increasing your monthly payments or down, lowering them.
Amortization – The term for the repayment schedule of your loan, including payments of the original amount borrowed and interest. This is displayed as a table, included with each payment and lets you know what your remaining balance is.
Appraisal – The estimated value of the property you wish to purchase. A bank usually requires this before issuing your loan to ensure the estimated value of the property does not exceed the amount borrowed.
Annual Percentage Rate (APR) – The method of calculating the cost of your mortgage, it is stated as a yearly rate that includes interest, mortgage insurance, points and credit costs. You use this to compare different loan options.
Closing Costs – The fees you are expected to pay when you close on your loan. They can attorney’s fees, credit report fees, document preparation fees, deed recording fees, appraisal fees and more depending on the state you live in.
Down Payment – The portion of the sales price you agree to pay in order to close the sale. This must be paid at closing. Most buyers put down 20 percent of the purchase price but it is possible to lower your down payment by securing certain loans.
Earnest Money – A deposit that shows you are serious about purchasing a property. Many builders will require this. The money is held by a neutral party.
Fixed-rate Mortgage – The most common type of loan. Your interest rate is pre-determined or locked in for the life of your loan. Such loans are generally 30 years in length, but loans can be issued for other durations.
Home Inspection – An evaluation by a professional inspector of your home’s structural and mechanical condition of a property (plumbing, foundation, roof, electrical, HVAC systems, etc.). Even if your home has just been built, it’s a good idea to have this done. The buyer pays for this.
Homeowners Association (HOA) – A nonprofit that manages the common area of a master-planned community. You pay a fee often called dues to jointly maintain any amenities your community offers.
Homeowner’s Insurance – An insurance policy that protects your investment, it usually includes personal liability insurance and hazard insurance coverage for your home and its contents. Lenders generally require this before you can close.
Points – Points allow you to prepay interest on your loan equal to one percent of the loan amount. Paying points upfront can lower your interest rate.
Pre-approval – Your lender’s guarantee that they will grant you a loan. It is recommended that you get this before home shopping as it demonstrates both your seriousness and the amount of home you can afford.
Private Mortgage Insurance (PMI) – If you need to put down less than 20 percent on your home’s purchase, you may be required to have this insurance, which is a monthly payment that protects lenders against a loss if you default.
Sales Contract – A legal agreement that sets out the terms of the sale. For a new construction home, this will often include both the base price of the home and any options and upgrades you agree to pay for.
Title Insurance – Another type of insurance you must pay for, this protects against any unknown liens or debts that may be placed against your property. Before being issued, a title search will be conducted to ensure that the current owner has the right to sell the property.