Buying a home is a common undertaking for many
Americans, but it's also one of the most complicated —
not to mention costly — purchases adults will ever
make. It's important to understand these 10 essential
terms so you're ready to make smart decisions with
your money.
Adjustable-rate mortgage (ARM): A
mortgage with an interest rate that can change over
time. It typically has a low, fixed initial interest
rate and then may adjust regularly either up or down
depending on market conditions. It can't exceed a
set rate cap.
Closing costs: Fees from buying a
house from both the lender and third parties like
inspectors, attorneys, surveyors and title insurance
companies. These typically add up to 3%-6% of the
total home price, though some of these charges are
negotiable.
Down payment: When you're buying a
home and financing it with a mortgage, most lenders
require you to put down a certain amount of cash
upfront, usually 5% to 20% of the total price. Your
mortgage covers the amount remaining after the down
payment. (Contact Sonoma FCU for lower down
payment options available to first time buyers)
Escrow: A neutral, third-party
account that protects the money of both buyers and
sellers until real estate transactions are
finalized. For example, if you choose to make a
deposit with an offer on a home, it would go into an
escrow account first rather than directly to the
seller. Once you've bought a home, escrow accounts
are also typically used to hold money for homeowners
insurance and property taxes until payment is
due.
FHA loan: A mortgage offered
through the Federal Housing Administration that has
less strict credit and down payment requirements
compared with conventional loans. It's ideal for
people with less-than-stellar credit who aren't able
to qualify for conventional financing. The tradeoff:
Along with paying monthly mortgage insurance fees,
you'll also pay a hefty upfront premium.
Fixed-rate loan: A mortgage with
an interest rate that won't change over the course
of the loan. The rate may be higher than an ARM, but
you'll never have to worry about it increasing.
Interest: Money your lender
charges you for cash you borrow, indicated by an
annual percentage rate, or APR (for example, 4%).
Your interest rate will depend on your credit
history and how much you can afford for a down
payment.
Principal: The amount of money you
borrow. Note that you end up paying significantly
more than this amount because of interest.
Private mortgage insurance (PMI):
If you don't put 20% of the home's price in a down
payment, some lenders require this insurance to
lessen their risk. It's typically paid with a
monthly fee added to mortgage payments. You can
often cancel it once you have a certain amount of
equity in the home.
VA loan: Mortgages for qualified
current or former members of the U.S. military.
These typically offer more favorable interest rates
and require low to no down payment. They're offered
by financial institutions but backed by the
Department of Veterans Affairs.
Home buying can be confusing, but knowing this
important lingo will make it easier to navigate the
process.
