Five mortgage terms explained for first-time buyers
Buying your first home is a thrilling, exciting experience that you’ll remember for the rest of your life. Here are five mortgage terms explained.
Like most first-time homebuyers, you’ll probably go through the entire spectrum of emotions when buying your first home. From the moment you decide to settle down until the moment you receive the keys to your house, you’ll face a wide range of unknown situations.
You’ll have to work with a real estate agent, find a reliable real estate brokerage, learn a lot of real estate terminology, and negotiate with banks and sellers.
The entire journey is sobering and can seem scary (it’s not), so if you don’t want to be caught off guard, it’s best to start preparing.
In this article we go through five of the most common mortgage-related terms every first-time home buyer needs to know to navigate their way out of the labyrinth of papers.
1) Down payment
The down payment is a sum of money that the buyer (you) has to pay upfront from their own pocket (even if they apply for a loan). This sum represents a percentage of the purchase price, and it can vary depending on a series of factors such as the type of purchase, the borrower’s credit score, the total price of the house, and more.
For instance, in the US, the standard down payment for a house is 20%. But there are ways to bring this sum down, and some people can even make do with as little as 3.5%. Of course, this is only possible through various programs designed to help specific segments of the population get a house.
2) Mortgage rates
The mortgage rate is the interest rate charged on your mortgage and is determined by the lender. The rate can be fixed (no changes throughout the life of the loan) or adjustable (it varies).
Your mortgage rate is often influenced by a series of factors, but the state where you live, your credit score, and the state of the economy are some of the most powerful ones. In layman’s terms, during times of economic growth (strong dollar), mortgage rates fall, and during times of unrest weak dollar) the rates rise.
3) Loan term
This specifies the time period you have to pay back the loan. For a house in the US, this period of time can be anywhere between a couple of years and 30 years, depending on the size of the down payment, your income, and the lender provider you choose.
At the end of the day, your mortgage lender is the one to decide your loan term, and you can learn more about it on this website.
4) Home insurance
When you take a loan to finance your house, you have to have home insurance. This is a requirement from most lenders out there, whether they are banks or other financial institutions, because it adds an extra layer of protection to the loan.
In most cases, you’ll be able to use your own insurer (if you have a good relationship with one), or you can work with the one appointed by the lender.
Again, the cost of your insurance will be determined by the state where you buy the house, the type of building, the types of risks common in the area, and other factors.
5) Mortgage closing costs
One of the most common mortgage mistakes first-time homebuyers tend to make is not budgeting for the closing costs. These are fees and expenses you have to pay in addition to the down payment to secure the loan.
These costs are around three to five percent of your loan and often include property taxes, the cost of appraisals, attorney fees, and more.
Make sure you’re ready to deal with unknowns
These are only some of the terms you’ll encounter during the process of buying a house, so make sure you’re prepared to deal with a lot of unknowns. The best way to do this is to hire a reliable real estate agent who can navigate the process and help you understand the things that seem foreign to you.
Overall, the road to becoming a first-time homeowner is arduous, but the reward is pretty sweet, so don’t let fancy terms and a mountain of papers discourage you.
Photo by Marek Levák