Buying and selling a property can be a confusing process with many unfamiliar terms. These ten terms will help you get started on your journey to finding your dream home and understanding every step of the way.
1. Adjustable-rate mortgage vs Fixed-rate mortgage
There are two types of conventional loans: fixed-rate and adjustable-rate mortgage. With an adjustable-rate, the interest rate can change over the course of the loan at five, seven, or ten-year intervals. If homeowners plan to stay in their homes for more than a few years, this can be risky because rates can change depending on market conditions. On the other hand, with a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan, which makes budgeting expenses from month to month easier.
Before receiving a loan from a bank to buy a home, an appraisal is needed to determine the value of the home. This is calculated based on an examination of the property itself and a comparison of the sale price to similar homes in the area. An appraisal is needed so the bank can ensure they are lending the correct amount of money.
3. Closing and Closing Costs
Closing refers to the meeting that takes place where the sale of the property is finalized. During this meeting, final documents are signed. This is also when closing costs are paid. Closing costs typically makeup 2-5% of the purchase price and can include loan processing costs, title insurance, and excise tax. In addition, the buyer also pays the down payment during closing.
For the purchase of a home to be finalized, there may be contingencies that have to be met. These can include, for example, that the appraised value is near the final sale price or that the loan is approved before finalizing the purchase.
Equity refers to how much of the home you own, or how much of the principal costs you have paid off. For example, if you have a $300,000 home and you still owe $250,000, you have $50,000 in equity.
6. Private mortgage insurance (PMI)
Private mortgage insurance (PMI) is an insurance cost the buyer pays to the lender to protect the lender from default. These payments usually end when the buyer builds up to 20% in equity.
Refinancing is restructuring your home loan with new rates and payment structures. This is usually done to arrange a lower interest rate, lower monthly payments, or to remove the PMI from the loan.
8. Title Insurance
Title insurance protects the buyer and covers research into public records to ensure the title of the home is clean and ready for sale.
9. Mortgage broker
The mortgage broker is responsible for arranging the deal between borrowers and lenders. This can include deciding on loan terms or finding a bank as a funding source.
Escrow refers to an account that the lender sets up to receive monthly payments from the buyer. This account is where funds for taxes are paid out.
When you are ready to find your dream home, let the realtors at Premier Properties help. View our available properties and let us help you on the journey to your new home. For our Indiana office, call 812-537-9669. For our Ohio and Kentucky office, call 513-354-2300.