Essential Homebuying Terms You Need to Know

Navigating the homebuying process involves understanding various terms and concepts. Knowing these key terms can help you make informed decisions and communicate effectively with real estate professionals. Here are essential homebuying terms you need to know:

1. Pre-Approval

   • A lender’s conditional approval for a specified loan amount based on a review of your financial information.

   • Shows sellers you are a serious buyer and gives you a clear budget.

2. Down Payment

   • The upfront payment you make when purchasing a home, typically expressed as a percentage of the purchase price.

   • Down payments usually range from 3% to 20% of the home's purchase price.

3. Interest Rate

   • The cost of borrowing money, expressed as a percentage of the loan amount.

   • Fixed rates remain constant over the loan term, while adjustable rates can change periodically.

4. Private Mortgage Insurance (PMI)

   • Insurance required by lenders when your down payment is less than 20% of the home’s value.

   • Protects the lender in case of default.

5. Closing Costs

   • Fees and expenses paid at the closing of a real estate transaction.

   • Common costs include appraisal fees, title insurance, attorney fees, and recording fees.

6. Escrow

   • A neutral third party holds funds and documents until all conditions of the sale are met.

   • Ensures a secure and orderly transaction.

7. Earnest Money Deposit

   • A deposit made by the buyer to show commitment to the purchase.

   • Typically 1% to 3% of the purchase price.

8. Title Insurance

   • Insurance that protects against losses from disputes over property ownership.

   • Owner’s policy protects the buyer; lender’s policy protects the lender.

9. Appraisal

   • An assessment of the property’s market value conducted by a licensed appraiser.

   • Ensures the loan amount does not exceed the home’s value.

10. Home Inspection

    • An examination of the property’s condition by a professional inspector.

    • Identifies potential issues and necessary repairs.

11. Fixed-Rate Mortgage

    • A mortgage with a constant interest rate and monthly payments that remain the same over the loan term.

    • Typically 15, 20, or 30 years.

12. Adjustable-Rate Mortgage (ARM)

    • A mortgage with an interest rate that can change periodically based on market conditions.

    • Initial fixed-rate period followed by adjustment periods.

13. Principal

    • The original loan amount borrowed, excluding interest.

    • Monthly mortgage payments typically include both principal and interest.

14. Equity

    • The difference between the home’s market value and the remaining mortgage balance.

    • Increases with mortgage payments and home value appreciation.

15. Amortization

    • The process of paying off a loan through regular payments over time.

    • Shows the breakdown of each payment into principal and interest over the loan term.

16. Contingency

    • A condition that must be met for the sale to proceed.

    • Common contingencies include financing, inspection, and appraisal contingencies.