Buying a home is simultaneously exciting and stressful. Owning a home is still a dream for many people, but first-time buyers often find that their unfamiliarity with the home buying process is a source of stress. Part of that stress stems from the terminology associated with home mortgages. Many terms may raise an eyebrow among first-time buyers, so the following are a few mortgage terms buyers can familiarize themselves with to facilitate the process of buying their own homes.
• Closing costs: Buying a home is expensive, and part of that expense is the closing costs. Any time a real estate transaction occurs, that transaction is accompanied by certain expenses, which are known as the closing costs. Closing costs may include attorney fees, loan origination fees, title insurance and escrow payments. Buyers can sometimes negotiate with the seller so the seller will agree to pay the closing costs, or the costs can be shared by the buyer and the seller. But buyers may also pay the closing costs in their entirety on their own.
• Escrow: Escrow is a bond, deed, document or money kept in the custody of a third party until a real estate transaction has been completed. In addition, escrow accounts are used to hold the property tax and insurance fees that are collected via your monthly mortgage payment.
• Fixed-rate mortgage: A fixed-rate mortgage, unlike an adjustable rate mortgage, is one in which the interest rate on the mortgage remains the same for the life of the loan. Buyers typically prefer a fixed-rate mortgage because they know exactly what they will be paying for their home each month. An adjustable rate mortgage, often referred to as an ARM loan, is one that typically comes with a lower interest rate than a fixed-rate mortgage, but that lower rate is usually only locked in for a relatively brief period of time, such as one year. Once that initial time period is over, the interest rate will then increase and may increase several times thereafter over the life of the loan.
• PMI: PMI, which stands for private mortgage insurance, must be purchased by home buyers who are financing more than 80 percent of their homes. The standard down payment when purchasing a home is 20 percent, but some buyers cannot afford such a down payment. As a result, the lender then mandates that such buyers purchase PMI, which protects the lenders if the borrower defaults on the loan. The cost of PMI will be added to your mortgage payment, and once you have 20 percent equity in your home you can cancel PMI, at which time your monthly mortgage payment will decrease.
• Title insurance: Title insurance is a tool that protects both the buyer and the seller against legal issues that may arise as a result of the home's title. Title insurance protects buyers and the lender from the possibility that the seller was not legally permitted to transfer ownership of the property to the buyer. Title insurance may also protect sellers from any issues that may arise that threaten his or her ability to sell the home.