Like anything you do for the first time, you’re about to encounter a whole new vocabulary when you purchase a home.
Sure, you’ve likely heard some of these terms, but whether or not you know what they mean is an entirely different matter. We’ve broken down some of the most commonly confused mortgage terms you’ll encounter when pursuing a mortgage.
Closing Costs
Closing costs are just what they sound like – the cost to close the purchase process.
These fees range from origination fees, notary fees, local taxes, and others and some are negotiable.
Your lender will send you a form, known as a Loan Estimate, within three days of receiving your application. This form contains important information, including estimated closing costs. Use this form to compare this lender’s costs to other lenders when shopping for a mortgage.
Down payment
Most first-time homebuyers understand that unless they’re paying cash for a home they will need a down payment. The confusion centers around who is making this requirement.
Hint: it’s not the home seller.
Indeed, this is a lender requirement and the amount you’ll need to pay varies according to the risk factor you present to the lender. USDA Rural Development and the Veterans Administration require no down payment for the loans they guarantee.
FHA offers low down payment options to certain borrowers.
You may also find that you qualify for municipal, state, and federal down payment assistance programs. Work closely with your lender to find all the help you’re entitled to.
Escrow
Think of “escrow” as a special type of account administered by a disinterested third party (typically an escrow officer) in which all the documents and monies pertaining to the real estate transaction are kept until closing.
Some of the items kept in an escrow account include the buyer’s earnest money deposit and the deed. There is also commonly a second escrow account in which the lender keeps your tax and insurance payments until they are due.
P.I.T.I.
This is your monthly loan payment and it stands for what is included in your payment: principal, interest, taxes, and insurance.
Points
You might overhear someone talking about “buying down” the interest rate on their mortgage. They are referring to the process of paying points, which can also be expressed as a percentage of the total loan amount.
If you want to spend a significant amount of time in the house, paying the point up front will result in cost savings.
Security
You may hear this referred to as “collateral,” and the words mean the same thing but “security” is more often used in mortgage transactions. The home you are purchasing is the security for the loan.
In other words, if you go upside down in your mortgage payments, the lender reserves the right to take the security (your home).
Title insurance
Given that the residence will serve as security for the loan, the lender will want to verify that there are no other parties who have a stake in the property.
A title insurance firm will investigate the history of the property’s ownership to determine whether or not there are any potential heirs or liens that could emerge in the future with a claim to the title. A guarantee that something like this won’t happen is provided by the title insurance policy.
Since we are not lenders, if you find that you do not understand any of the mortgage conditions, you should not be afraid to approach your lender for an explanation. The vast majority are more than willing to lend a hand.
