If you are in the market to buy a new home, you might feel overwhelmed by a process that is seemingly unfamiliar to you. From the selection of the home that is right for you, to applying for a mortgage and more, you may be confronted with various terms and phrases that you do not understand. By learning more about the ABCs of buying a home, you will be able to relax and walk through the process with greater confidence.
Amortization: A mortgage term that describes the period of time that is required to pay off the original loan balance.
Builder: A company or a private individual who is contracted to build a new home from the ground up.
Closing Costs: A general term to describe all of the fees that you may be responsible for. The average closing costs range from one to four percent of the sales price, and some closing costs include legal fees, disbursements, transfer fees and more.
Deed: This also may be referred to as the “transfer,” and it describes the document that legally transfers ownership from the seller to the buyer.
Equity: This is the difference between the value of the home and the amount of debt owed through a mortgage. Equity may be established through making regular monthly loan payments, buying a home below market value, appreciating property value and capital improvements to the property.
Fixed Rate Mortgage: A type of mortgage that has a steady interest rate for the entire mortgage term. This is opposed to an adjustable rate mortgage, which features periodic and defined adjustments to the interest rate based on market conditions throughout the life of the loan.
Gross Monthly Income: This is a financial term that a mortgage company or lender may use during the pre-qualification and underwriting process. It describes your total income before taxes and deductions on a monthly basis.
Home Inspector: An individual who may be contracted to inform you about current or previous repair or safety issues in the home through the completion of a full inspection and a written report.
Interest Rate: The cost associated with using borrowed money to buy a home. This rate is applied to the debt, and interest charges are paid to the lender.
Lien: Another term for a mortgage, but it may also describe vendor liens from a contractor or another service provider. These are recorded against a property and typically must be paid off before the deed transfer can take place.
Mortgage: This is also known as a home loan, and it relates to the borrowed funds used to purchase the home. Generally, the mortgage is defined by strict repayment guidelines or rules, and the buyer must sign a mortgage document agreeing to the loan terms at closing.
Net Worth: A calculation that indicates your total financial assets minus your total liabilities.
Open House: A special event that allows buyers to enter a home and view the property without scheduling a showing or tour. This public event is typically scheduled by a real estate agent and occurs for a defined period of time.
Principal: This is the face value of the amount of money you own on the loan. At the start of the loan, it is the original loan amount, and it does not include interest charges. The principal generally will be reduced with regularly monthly payments until the loan is paid in full.
Real Estate Agent: An individual who is contracted by the seller to list a home or by a buyer to represent interests when making a purchase. It is common for buyers and sellers to each have their own real estate agent representing them in the transaction.
Survey: A document that is prepared by a professional land surveyor that shows the property boundary lines, the location of buildings, encroachments and easements.
Term: This is a term that relates to how long the interest rate and other mortgage conditions remain fixed, and the term may not always coincide with the amortization.
Title Insurance: A type of insurance that is typically required by a lender and that insures against any issues related to title or ownership of the real estate.
Variable Rate Mortgage: A term that relates to a mortgage with an adjusting interesting rate. While the interest rate adjusts, the mortgage payment remains the same.
There you go! Some of the terms you could hear when looking at buying a new home. Keep in mind that the definitions we've used are the most common use of the word, but it could have a different meaning, depending on the context. This is by no means a complete list, just something to help you get started!