Home buying is a wonderful thing, but it can be stressful — especially if the broker, agent, or representative you’re working with casually throws out terms you don’t understand. To better prep you for this next stage of your life, here’s a glossary on financial terms that you should know before buying or owning pretty much anything.
One of the main things in a home buying process. When you purchase a home, chances are, there will be things you need to fix or maintain. In order to make sure you aren’t walking into unforeseen expenses, hire a licensed inspector to do an inspection. This person will come in and evaluate the house, checking for things like insulation, foundation, electrical, plumbing, and the roof. While it can be scary if the inspector finds major issues in your dream home, remember, it’s better to know everything up front before jumping in.
This number represents your current ability to pay off debts. Credit scores are impacted by paying credit cards and loans on time, and how much available credit you are using. Try avoiding coming too close to your credit limit each month. How long you’ve had credit will also impact your score.
When purchasing a home, you’ll have a mortgage and there is often the expectation that you will put money down. The down payment is a percentage of the purchase, or appraised value of the home. For example, on a $275,000 home with a 2% down payment, the homebuyer pays $5,500 for the down payment. Keep in mind that some neighborhoods ask for 10-30%, so be careful.
When you finance a property, as a home buyer, you must pay certain fees at closing. Luckily, lenders have multiple rates to choose from, with different costs associated. Typically, they’ll present an option, and you’ll chose what makes the most sense for your goals.
Put simply, interest rates represent the cost of borrowing money. In a mortgage, the interest is usually charged monthly, and included as part of the payment.
A type of loan (fixed-rate or adjustable-rate) that is specific to financing a home. Fixed rate means the interest rate will remain the same for the life of the loan. An adjustable-rate mortgage means the starting interest rate will be fixed for a period of time (ranging from 3-10 years), then adjusted based on market conditions for the remainder of the term.
An expert opinion of the value of the home. Essentially, an appraiser will compare the home to recent sales in the area, look at size, age, construction, and a few other factors. The report will tell the buyer, lender, or seller what the market value of the home is.
Guidelines set by separate financial entities establish rules that lenders have to follow—debt, total gross income, etc. Your lender will divide your total monthly debt payments by your monthly income.
APR (Annual Percentage Rate)
Takes the extra costs and expresses them as percentages. Basically, this percentage is there to make it easier to compare all the costs from the initial lender versus the costs to finance with another lender.
When you purchase a home, there are annual property taxes and insurance bills that will need to be paid. Occasionally, they are large expenses presented in a lump sum, or broken up over multiple installments. The servicer will create an escrow account to hold the monthly tax and insurance deposits. Then, once it’s time to pay the bills, the company will pay them out on your behalf.
Here’s some more financial terms you may not know and some financial podcasts to help you get that paper in order.
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