Home Buying Term Definitions
Buying your own home can be a confusing, frustrating process. Understanding the terminology used in this process can reduce the aggravation home buyers normally experience. Here are a few terms you might want to familiarize yourself with before you call a real estate agent.
This is basically the repayment schedule for your mortgage. It shows exactly how much of each payment you make goes toward the principal of the loan and how much goes toward the interest on the loan. In the beginning, the first payments are applied almost completely toward the interest. Each payment thereafter gets applied less to the interest and more toward the principal until, eventually, each payment you make is applied mostly toward the principal.
An appraisal is an estimate of a property’s value. This is usually paid for by the homebuyer and most lenders will not approve your loan request without an appraisal of the home you’re interested in.
A buyer’s agent represents the buyer and only the buyer. An agreement is usually reached between buyer and agent and the agent now acts on behalf of his buyer’s interests. A buyer’s agent can be very helpful in locating homes, answering real estate questions and, in the end, saving you a lot of money.
Closing is the final step in the purchasing/selling process. It is at this point that the deed to the property finally changes hands and the mortgage is finalized.
Closing costs are the final fees required at closing (see above). These can include attorney’s fees, recording fees, etc. and usually end up around 3%-5% of the home’s actual cost. In negotiations, the buyer may get the seller to absorb some of these costs.
Earnest Money is money deposited on the home to show that the buyer is seriously interested in purchasing the home. This money is held in escrow (see below) until closing and is then added to the down payment. It basically shows the seller that you are sincerely interested in their home.
Escrow is monies that are held by a third-party until closing. Future taxes and homeowners insurance, which are usually held by the mortgage company beyond the closing date, are also considered escrow.
For Sale By Owner (FSBO)
FSBO means that there is no selling agent involved in the sale of this home. This does not mean that as a buyer you cannot have a buyer’s agent acting in your interest – in fact, it is recommended. FSBO can also be used to reference the homeowner/seller themselves.
Foreclosure is the process of the lender reclaiming and reselling the property after the borrower defaults on the loan. Make sure you can afford the mortgage before you get it.
A lien is a legal claim on the property (usually incurred from a large debt of some sort) that disallows the sale of the property until the lien has been paid off. For example, unpaid property taxes can result in the state putting a lien on your property until the taxes are paid off.
Loan Origination Fee (LOF)
The LOF is what the lender charges the borrower for processing the loan. This is one of the fees that are due at closing.
Private Mortgage Insurance (PMI)
PMI is required when buyers make a down payment of less than 20% of the cost of the home. PMI will protect the lender in the case that the borrower defaults on the loan. After 20% of the loan’s principal has been paid off, borrowers can cancel the PMI.
Title insurance eliminates the possibility of someone laying claims against the title of your property.
Home buying can be confusing – understand these terms and the process will make your transaction go much smoother.
Jim Miller is a full time full service licensed Realtor® in the Southern New Hampshire area with Bean Group and has many years of experience buying and selling New Hampshire Real Estate .
Contact Jim direct at 603-801-3987.
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