July 1, 2022
Finance Terms Every Buyer Should Know
Finance Terms Every Buyer Should Know
Financing the purchase of a new home can feel overwhelming, especially if you're navigating the process for the first time. Understanding common financial terms can make everything clearer, reduce stress, and help you make confident decisions throughout your homebuying journey. Here are some of the most important concepts every buyer should know:
- Adjustable Rate (ARM): A mortgage with an interest rate that changes at specific times based on market conditions. ARMs often start with a lower rate before adjusting.
- Annual Percentage Rate (APR): The total annual cost of borrowing, expressed as a percentage. APR includes fees such as mortgage insurance, points, and closing costs—providing a more accurate picture than interest rate alone.
- Appraisal: A professional estimate of a home's value, typically required by the lender to ensure the property is worth the purchase price.
- Closing Costs: The fees due at closing, which may include the down payment, appraisal fees, attorney fees, title fees, and points used to lower an interest rate.
- Closing/Settlement/Escrow: The final step in the transaction where documents are signed, funds are transferred, and ownership officially changes hands.
- Conventional Loan: A mortgage not insured by the FHA or VA. These loans often have stricter credit requirements but flexible terms.
- Cost Calculations: The full financial picture of buying a home, including purchase price, down payment, closing costs, HOA fees, insurance, taxes, utilities, and maintenance.
- Credit Report: A detailed overview of your credit history used by lenders to assess risk. Reports are provided by Equifax, Experian, and TransUnion.
- Credit Score (FICO): A numerical rating that indicates how likely a borrower is to repay debt. Higher scores generally qualify for better loan terms.
- Down Payment: The upfront amount paid toward the purchase of a home. Common down payments range from 5%–20% depending on loan type and buyer qualifications.
- Earnest Money Deposit: A good-faith deposit submitted with an offer to demonstrate buyer seriousness. If the offer is accepted, the amount is applied toward closing costs or the down payment.
- Equity: The difference between a home's market value and the amount owed on the mortgage.
- Escrow Payment: Part of a monthly mortgage payment set aside by the lender to pay property taxes, insurance, and other recurring expenses.
- Fee Simple: Complete ownership of a property, including the land it sits on.
- FHA Loan: A government-insured mortgage that allows for lower down payments and more flexible qualification standards.
- Fixed Rate Mortgage: A home loan with an interest rate that stays the same for the entire term, providing predictable monthly payments.
- Pre-Approval: An important first step where a lender evaluates your finances and determines how much you are qualified to borrow. This strengthens your offer when you find a home you love.
- Private Mortgage Insurance (PMI): Insurance required when a buyer puts down less than 20%. PMI protects the lender but enables buyers to purchase with a lower down payment.
- Title Insurance: Protection against any disputes or issues related to ownership history or liens on the property.
- VA Loan: A government-backed loan available to qualifying U.S. veterans, service members, and surviving spouses. VA loans often require little to no down payment and offer competitive rates.
Understanding these terms can make the path to homeownership far smoother. And when you're ready to explore new homes, the Ernest Homes team is here to guide you every step of the way.
We build beautiful single-family homes throughout Savannah and Coastal Georgia. When you're ready to begin your homebuying journey, connect with us today.
