Buying a home for the first time? You may discover that one of the biggest obstacles is learning the lingo. Homebuying can be overwhelming and perhaps a bit intimidating if you aren’t familiar with the terminology.
To help aspiring homeowners gain confidence in the homebuying process, the experts at Freddie Mac are sharing a guide with some top terms you’ll hear.
• Pre-approval letter. A letter from your lender telling you how much home you can afford and the maximum amount you are qualified to borrow. Having a pre-approval letter while shopping can help you move faster, and with greater confidence in competitive markets.
• Appraisal. After you make an offer on a home, your lender will order an appraisal to get a professional opinion on its value. This is a necessary step in getting financing secured, as it validates the worth to you and your lender.
• Closing costs. In addition to a home’s price, a buyer must pay “closing costs.” This is the cost to complete the real estate transaction. This includes points, taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs. Closing costs are generally two to five percent of your home purchase price.
• Escrow. The holding of money or documents by a neutral third party before closing, escrow can also refer to an account held by the lender or servicer into which a homeowner pays taxes and insurance.
• Mortgage rate. The interest rate you pay to borrow money for your house. The lower, the better.
• Fixed-rate mortgages. A mortgage with an interest rate that doesn’t change during the term of the loan, and is typically 15 or 30 years.
• APR. The annual percentage rate, commonly referred to as “APR,” is a broader measure of your cost for borrowing money and includes the interest rate, points, broker fees and other credit charges you’ll be required to pay. Because these costs are rolled in, the APR is usually higher than your interest rate.
• Credit Score. A number ranging from 350 to 800 based on an analysis of your credit files. Your score plays a significant role when securing a mortgage, as it helps lenders determine the likelihood that you’ll repay future debts. The higher your score, the more options that may be available to you, including lower interest rates.
• Private Mortgage Insurance (PMI). If you make a down payment of less than 20 percent on your conventional loan, your lender will require PMI. PMI serves as an added insurance policy protecting the lender if you’re unable to pay your mortgage, and it can be cancelled from your payment once you reach 20 percent equity in your home.
Hear a term not included or confused by some of the processes? Check out Freddie Mac’s myhome.freddiemac.com for everything homebuying and be sure to follow the Freddie Mac’s Spring Homebuying Season Blog Series at freddiemac.com/blog.
“Homebuying speak can seem like an entirely new language, especially for first-time homebuyers. Before entering the market, it’s helpful to learn key phrases and terminology so you can be a confident, savvy shopper,” says Mike Dawson, Vice President of Single-Family at Freddie Mac. (StatePoint)