There are 10 important terms you need to know if you’re buying a house for the first time. We sat down with David Nelson, Mortgage Originator, NMLS # 1718338 with Illinois National Bank, to get you the extra insights you need.
Important Terms to Know
1. Fixed-rate mortgage: This is a mortgage with a fixed rate during its term, which means the interest rate you pay won’t change. If you have a 4.75% interest rate and a term of five, 10, 15, or 25 years, that means your rate won’t change unless you refinance.
2. Adjustable-rate mortgage (ARM): This is the opposite of a fixed-rate mortgage. With an ARM, you’ll have a shorter term (somewhere between five and 10 years), then once that term concludes, the interest rate will adjust. So while your interest rate and monthly payment may be lower at the beginning, those may increase over the life of the loan.
3. Pre-qualified: This is often viewed as the first step in the mortgage process. With pre-qualification, you talk to a lender, like David, and supply an overview of your financial history, including income, assets, debts, and credit score. The lender can then give you an estimate of the amount you would qualify for. The second step of the mortgage process is pre-approval, which requires you to submit documentation like pay stubs, tax returns, and bank statements as well as a credit check. In our local market, sellers expect buyers to have met with a lender to show they are qualified to make a purchase, so the sooner you can meet with a lender like David, the better position you will be in when you find the home you want to buy.
4. Conventional loans: This is one of many loan programs available and typically carries with it a 30-year mortgage or something similar. Conventional loans require minimums when it comes to credit scores and down payments.
5. FHA loan: This is a great loan for anyone who’s gone through some credit dings. An FHA loan is insured by the Federal Housing Administration and offers more relaxed credit scores and lower upfront costs. However, borrowers must pay mortgage insurance premiums to protect the lender if a borrower defaults.
6. Appraisal: An appraisal is when a third-party company analyzes the property and compares it to other comparable properties within a certain radius. Factors that are considered include the home’s condition, style of property, and lot size. The appraiser then provides an estimate to determine what the home’s value is so that the bank doesn’t lend you more than the property is worth.
7. Mortgage insurance: Mortgage insurance exists to protect the bank. If you don’t want to pay a mortgage insurance premium, you’ll need a bigger down payment, typically at least 20%. Usually after your payments reach 20% of the value of the home, you no longer have to pay PMI. And there are plenty of programs out there that don’t require you to use mortgage insurance, so it’s worth discussing your options with a local lender.
8. Closing costs: Closing costs are fees related to buying a house that your lender or other third-party vendors, like inspectors, charge you. Roughly, you can expect your closing costs to be between 2% and 5% of your purchase price. Your Ryan Dallas Real Estate buyer specialist can advise you on how to offset some of these costs during the purchasing process.
9. Buying down your rate: If you have a certain credit score but you have a lot of cash, and you have a high interest rate because of that score, you can literally pay to buy a better interest rate. Your mortgage professional can evaluate your best options based on your plans for the property.
10. Escrow: There are a lot of uses of the word escrow. In the context of homeownership, escrow comes up twice. The first instance is during the process of closing on your home when an escrow account is used to hold earnest money. The second instance is as a long-term account that you pay property taxes and insurance into each month as part of your mortgage payment to be held until those payments are due.
If you have any more questions about any of these terms or you’re thinking of buying or selling a home, don’t hesitate to reach out to us. We’re here to help!