10 Terms First-Time Homebuyers Must Know

House hunting and applying for a mortgage is easier when you learn how to talk like the pros.

By Geoff Williams, Contributor |April 10, 2017, at 11:21 a.m.

10 Terms First-Time Homebuyers Must Know

Slideshow

Know the lingo.

Young couple gets house key to their first home from their realtor.

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It’s spring and the start of the home-selling and buying season, and you're probably already starting to see the “For Sale” signs posted in yards as well as online advertisements beckoning prospective homebuyers. But before you allow yourself to be beckoned, it would behoove you to familiarize yourself with the following 10 terms – especially if this is your first time making one of the biggest purchases of your life.

Fixed-rate mortgage

Fixed-rate mortgage

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This means the interest rate you pay on your home loan won't change. Over the years, your mortgage payment will likely change some – property taxes will likely rise, your homeowners insurance might climb or fall, or you might shed your PMI (a term we’ll come back to). But generally, if you have a fixed-rate mortgage, your monthly mortgage payment won't change much over the years.

Adjustable-rate mortgage

Adjustable-rate mortgage

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Also known as an ARM, this is essentially the opposite of a fixed-rate mortgage. You'll have a fixed rate for several years, maybe five or 10, and then the interest rate adjusts according to the fully indexed interest rate, often the prime rate, which is what banks charge their most creditworthy customers. So while your interest rate and payments will likely be lower in the beginning than those of the homeowner with the fixed-rate mortgage, hope that interest rates remain low throughout the life of your loan. As interest rates climb, so too will your own interest rate and monthly payments.

Prequalified

Prequalified

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This can be a confusing term, mostly because homebuyers tend to mix it up with preapproved, says Rick Hogle, chief strategic officer at Supreme Lending, a mortgage company in Dallas. If your lender tells you that you're prequalified for a house, that's a good start – but you're still a long way from being a homeowner. "Prequalification requires less documentation," Hogle says. "It provides a general idea of the loan amount in which a homebuyer might qualify." This way, you can start looking for a home and have a sense of what type of house you can afford. Preapprovals require the submission of many more documents, such as pay stubs, bank statements and tax returns.

Conventional loans

Conventional loans

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These are the typical loans that many people, but not all, apply for when they want a mortgage. "Those with low credit scores usually won't qualify for conventional loans," says Passard Dean, professor of accounting at Saint Leo University in Saint Leo, Florida. "In the past, you were also required to put a down payment of at least 5 percent. However, with the new guidelines from Fannie Mae and Freddie Mac, you can now put a down payment as low as 3 percent. These loans generally require a credit score of above 650.

Federal Housing Administration loan

Federal Housing Administration loan

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Have poor credit? You'll probably get one of these, also known as FHA loans. “These are excellent for first-time homebuyers with subprime credit scores," Dean says. "In addition to more relaxed credit scores and lower upfront costs, the down payment can be as low as 3 percent."

Appraisal

Appraisal

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This is an estimate that determines what your property is worth. Banks need homes to be appraised, in part, so they don't lend you, say, $300,000 for a house that's only worth $175,000. After all, if you can't pay the loan, the bank will send you packing and will sell the home. But most people won't buy a $175,000 home for $300,000, and knowing that, the bank doesn't want to lend you more than your house is worth.

Private mortgage insurance

Private mortgage insurance

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This is a monthly insurance payment you'll have to pay if the down payment on your house is less than 20 percent of the appraised value or sale price. If you don't want to pay the PMI fee – which often ranges from .03 to 1.15 percent of the original loan, divided into 12 monthly payments – you'll have to fork over a bigger down payment or buy a cheaper house. Usually, PMI insurance isn't something you pay forever (it just seems like it, if you have a small down payment). Typically, after your payments reach 20 percent of the value of your home, you stop paying PMI.

Closing costs

Closing costs

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These are fees related to buying a house that your lender charges you, or you rack up from various third parties, such as a home inspector. According to the online real estate database Zillow, expect your closing costs to be 2 to 5 percent of the purchase price of your home. That may sound like a lot, but there are many costs involved in closing the deal, from buying title insurance to paying for points and attorney and surveyor fees.

Points

Points

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One point is a charge equal to 1 percent of the loan amount. So if you're buying a $200,000 house, and a lender is charging you 2 points, that's $4,000. Three points, $6,000. Points are prepaid interest. The more points you pay, the lower your interest rate will be. If you're planning to live in your house a few years, you could make a good argument for not paying points, but if you believe you'll go the distance with a 30-year mortgage, it generally makes financial sense to pay as many points as you can to snag that lower interest rate, which, in the long run, could save you money.

Escrow

Escrow

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This word can be used in a few different ways, but when you think escrow, think of a third, neutral party. For instance, a deposit you make after your offer on a home is accepted would then be put in escrow. Usually you can’t recoup these deposits if you back out of the contract, but if the seller decides to sell the home to somebody else, you’d most certainly get your deposit back. The escrow account keeps your deposit safe so the homeowners don't inadvertently spend your money. You might also hear your lender talking about an escrow account where your property taxes and homeowners insurance go until they're paid.

Read More

Geoff Williams has been a contributor to U.S. News and World Report since 2013, writing about a variety of personal finance topics, from insurance and spending strategies to small business and tax-filing tips.

Williams got his start working in entertainment reporting in 1993, as an associate editor at "BOP," a teen entertainment magazine, and freelancing for publications, including Entertainment Weekly. He later moved to Ohio and worked for several years as a part-time features reporter at The Cincinnati Post and continued freelancing. His articles have been featured in outlets such as Life magazine, Ladies’ Home Journal, Cincinnati Magazine and Ohio Magazine.

For the past 15 years, Williams has specialized in personal finance and small business issues. His articles on personal finance and business have appeared in CNNMoney.com, The Washington Post, Entrepreneur Magazine, Forbes.com and American Express OPEN Forum. Williams is also the author of several books, including "Washed Away: How the Great Flood of 1913, America's Most Widespread Natural Disaster, Terrorized a Nation and Changed It Forever" and "C.C. Pyle's Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America"

Born in Columbus, Ohio, Williams lives in Loveland, Ohio, with his two teenage daughters and is a graduate of Indiana University. To learn more about Geoff Williams, you can connect with him on LinkedIn or follow his Twitter page.

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