Financing Terms You Should Know

Mortgage:

A loan provided by a bank or mortgage lender to finance the purchase of a home. The borrower agrees to repay the loan amount plus interest over a specified period, typically 15 to 30 years.

Down Payment:

The initial payment made by the buyer towards the purchase price of the home. It is usually expressed as a percentage of the total purchase price, with 20% being a common benchmark to avoid private mortgage insurance (PMI).

Interest Rate:

The percentage of the loan amount charged by the lender as interest on the borrowed funds. It determines the cost of borrowing and directly impacts the monthly mortgage payments.

Principal:

The original amount of money borrowed from a lender, excluding interest and other charges. Monthly mortgage payments typically consist of both principal and interest.

Amortization:

The process of paying off a loan over time through regular payments, which include both principal and interest. An amortization schedule outlines the breakdown of each payment, showing how much goes towards principal and interest each month.

Closing Costs:

Fees and expenses associated with finalizing the purchase or sale of a home. These may include appraisal fees, title insurance, attorney fees, property taxes, and loan origination fees. Both buyers and sellers typically incur closing costs.

Pre-Approval:

A preliminary assessment by a lender indicating how much money you can borrow for a mortgage based on your financial information, credit score, and other factors. Pre-approval strengthens your offer when purchasing a home by demonstrating your financial readiness to sellers.

Escrow:

A financial arrangement where a third party (usually an escrow company or attorney) holds funds or documents on behalf of the buyer and seller during a real estate transaction. This ensures that all parties fulfill their obligations before the transaction is completed.

Appraisal:

An evaluation of the fair market value of a property conducted by a licensed appraiser. Lenders require appraisals to ensure that the property's value is sufficient to support the loan amount.

Home Equity:

The difference between the current market value of a home and the outstanding balance of any mortgage or other liens against the property. Home equity represents the homeowner's ownership stake in the property and can be accessed through home equity loans or lines of credit.

Closing Disclosure (CD):

A document provided to the borrower by the lender at least three business days before closing a mortgage loan. It outlines the final terms and costs of the loan, including interest rate, monthly payments, closing costs, and any prepaid expenses.

Understanding these financing terms will empower you to make informed decisions throughout the home buying or selling process. If you encounter unfamiliar terms, don't hesitate to ask your real estate agent or lender for clarification.