Deciphering the Details for First-Time Home Buyers
So you’ve found the perfect home and the asking price is fair. You’re just itching to utter those three special words: “We’ll take it.”
But before you prepare to sign the dotted line, are you prepared for what comes next? Here is a quick glossary of real estate financing terms to help you through the next stage of purchasing that dream home.
The deposit you pay after accepting a seller’s offer is placed in escrow: a neutral, third-party account. If the seller attempts to sell the property to someone else, escrow protects you from losing your money. Some loan lenders also expect buyers to place enough funds in escrow to cover both their homeowner’s insurance and property taxes for the year.
Borrowing the money to purchase a home comes at a cost. This includes origination fees from the lender and legal fees and title insurance from the title company. If they aren’t paid beforehand, closing costs may also include items such as the home inspection and initial home insurance premiums. You should receive a standardized form called a closing disclosure that outlines all of these costs, and who is paying for them, in advance of your closing.
This is an up-front payment made at the time of purchase. The amount required will vary depending on the borrower and the loan requirements. FHA loan programs typically require at least 3.5 percent of the sales price at closing, while 5 percent is a common down payment for conventional loans. Your down payments may affect other mortgage terms, including interest rates. Higher down payments can result in lower interest rates. Be prepared if you plan to make a down payment that’s below 20 percent—your lender may require you to pay additional Private Mortgage Insurance premium.
Private Mortgage Insurance
While home insurance protects against damage to the home, private mortgage insurance protects the lender in the event you fail to pay your mortgage. It is an added cost that homeowners prefer to avoid if possible, since it doesn’t benefit them directly. Refinancing options may allow homeowners with increased equity to end their PMI requirements.
The home inspection is one of the must-have expenses when it comes to home buying. A third-party expert will examine the home’s condition and systems on the buyer’s behalf. They will provide a detailed report that highlights any areas of concerns. Often, this report is used to negotiate repairs or price reductions prior to completing the sale.
While a home inspection focuses on the function of a house, the appraisal determines its market value. Designed to protect the buyer, and primarily the lender providing the funding, a home appraisal ensures that the house is actually worth the negotiated price. An appraiser compares the home and its features to similar homes that have sold recently. If the value comes in lower the sales price, buyers will likely need to renegotiate or reduce the amount they plan to borrow by putting in more of their own money.
Fixed Interest Rates vs Adjustable Rates
Different mortgages fit different homebuyer needs. Fixed-Rate Mortgages, for example, offer interest rates that never change, but those rates start higher than what an Adjustable-Rate Mortgage (ARM) would offer. ARMs appear cheaper at first glance, but they’re vulnerable to steep rate hikes after the initial rate period finishes. Some ARMs have limitations on how high the bank can raise interest rates. In the end, whichever loan you choose, make sure you understand exactly how your interest rates will affect you over the life of the loan.
These terms are, of course, just the tip of the iceberg. Don’t be scared to ask questions if you don’t understand what your lender is telling you. Additionally, Open Mortgage has dedicated professionals available to answer your questions and discuss your home financing needs today. Please visit OpenMortgage.com to learn more and to start talking to an agent.