13 Essential Terms Home Buyers Should Know
What do body parts and acronyms have to do with buying a home? Plenty, as it turns out. From ARMs to Zoning, you may encounter some new language. You don’t have to be a Words with Friends expert to purchase a home, but knowing some basic terms will make the process a lot easier.
1. Adjustable Rate Mortgage (ARM). A type of loan where the interest rate changes periodically, up or down, usually once or twice a year. Rates change generally according to movement in the financial market.
2. Annual Percentage Rate. The yearly cost of finance charges (interest, loan fees, service charges, mortgage insurance or other items).
3. Appraisal. An estimate of the fair market value of a land parcel and any improvements at a given point in time. This evaluation generally determines what the property would sell for in the current marketplace.
4. Cap. The limit to the amount an interest rate or monthly payment can increase for an ARM; may apply to either each adjustment or over the life of the loan.
5. Closing. The final step in the purchase process when, through a licensed escrow holder (a neutral third party) the payment of the purchase price to the seller is completed, the Buyer’s note and loan agreement are delivered to the lender, and the deed to the buyer and any mortgage (trust deed) are delivered to the county recorder’s office for recordation.
6. Conventional Loan. A mortgage-secured loan that is not insured or guaranteed by a government agency such as FHA, VA or Farmers Home Administration.
7. Credit rating. A numerical score formulated by a credit bureau to assist a lender and seller in determining if a potential home buyer is a good credit risk.
8. Earnest Money. Money the buyer gives the seller to motivate the seller to enter into a purchase-and-sale agreement with the buyer. These funds are later applied to the purchase price of the home.
9. Equity. The difference between what a home is valued and what is owed on it.
10. Fixed Rate Mortgage. A loan with an interest rate that remains the same for the entire repayment term.
11. PITI. Principal, interest, taxes and insurance; a quick way to reference your combined monthly house payment.
12. Principal. The amount of a loan, not including interest or other charges.
13. Private Mortgage Insurance (PMI). A type of insurance that is usually required by a lender if your down payment or equity is less than 20 percent of the loan value. PMI insures the lender against loss if you were to default on your mortgage.
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