What 10 Terms Should All First-Time Homebuyers Know?
1. Fixed rate mortgage: This is a mortgage with a fixed rate during its term. If you have a 4.25% interest rate and a term of five, 10, 15, or 25 years, that means your rate won’t change unless you refinance.
2. Adjustable rate mortgage (ARM): This is the opposite of a fixed rate mortgage. With an ARM, you’ll have a shorter term (somewhere between five and 10 years), but once that term concludes, the rate will adjust based on the other interest rates the bank charge. This can get confusing, so I advise that you speak to a lender if you’d like more clarification.
3. Pre-qualified: This means you talk to a lender and give them all your paperwork (bank statements, tax documents, etc.) so they can verify whether you’re qualified to buy or not. If you make $10 an hour, you’re probably not qualified to buy a million-dollar home. If you make $1,000 an hour, you probably are.
4. Conventional loans: This is one of those loans that typically carries with it a 30-year mortgage or something similar. There are many loan products out there, so if you don’t have a high credit score, you generally won’t be able to qualify for a conventional loan—you need a minimum 650 FICO credit score so apply. The average down payment for a first-time homebuyer is only 5%, though, so there’s no need to worry.
5. FHA loan: This is a great loan for anyone who’s gone through some credit dings. The FHA stands for Federal Housing Administration. With this loan, you can put down a minimum of 3.5%. You will have to carry mortgage insurance, but you can take that off later down the road.
6. Appraisal: An appraisal is when a third-party company analyses your property and compares it to other comparable properties within a certain radius. The home's condition, style of property, lot size, and a variety of other factors are taken into consideration. If you offer $250,000 for the home and the appraisal comes in at $300,000, either the purchase price must come down or you have to put another $50,000 into the deal to make it work.
7. Mortgage insurance: Mortgage insurance exists to protect the bank. If you don’t want mortgage insurance, you need to put at least 20% down. If you don’t put at least 20% down, you’ll get anywhere from 0.03% to 1.15% mortgage insurance tacked on to your rate. There are ways around this, though, and plenty of programs out there that don’t require you to use mortgage insurance.
8. Closing costs: What you pay in closing costs depends on you and what third-party vendors you may have brought in for expenses, such as multiple different home inspections. You can expect your closing costs to be between 2% and 5% of your purchase price.
9. Buying down your rate: If you have a certain credit score but you have a lot of cash, and you have a high interest rate because of that score, you can literally pay to buy a better interest rate.
10. Escrow: Escrow means you’re at the signing table signing away! An escrow account is a locked account which holds the buyer’s deposit so the seller can’t pull it out and the buyer can’t spend it. The way it’s kept safe is through non-conflicting instructions from both the buyer and the seller regarding releasing that cash, usually when the deal ends.
If you have any more questions about any of these terms or you’re thinking of buying or selling a home, don’t hesitate to reach out to me. I’d love to help you.
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