Homebuying Terms You Need to Know

1. Appraisal

An appraisal is an evaluation of a property’s value conducted by a licensed appraiser. Lenders require an appraisal to ensure the loan amount is appropriate for the home’s market value.

2. Closing Costs

Closing costs are fees associated with finalizing a home purchase. These can include loan origination fees, title insurance, appraisal fees, attorney fees, and more. Typically, closing costs range from 2% to 5% of the home’s purchase price.

3. Contingency

A contingency is a condition that must be met before a real estate contract becomes binding. Common contingencies include financing, home inspection, and appraisal contingencies. These allow buyers to back out of the contract or renegotiate if certain conditions aren’t met.

4. Down Payment

The down payment is the portion of the home’s purchase price that the buyer pays upfront, typically ranging from 3% to 20% of the price. The remaining balance is covered by a mortgage.

5. Earnest Money

Earnest money is a deposit made by the buyer to show they are serious about purchasing the property. It’s usually held in escrow and applied to the down payment or closing costs. If the deal falls through due to a contingency, the buyer can often get their earnest money back.

6. Escrow

Escrow refers to a third-party service that holds funds and documents until all conditions of the sale are met. Escrow is used to manage earnest money, property taxes, and insurance payments until the closing process is complete.

7. Fixed-Rate Mortgage

A fixed-rate mortgage has an interest rate that remains the same for the entire term of the loan. This means your monthly mortgage payments stay consistent, providing stability over time.

8. Home Inspection

A home inspection is an evaluation of a property’s condition by a professional inspector. It helps buyers identify any potential issues before closing. Inspections typically cover the foundation, roof, plumbing, electrical systems, and more.

9. Interest Rate

The interest rate is the cost of borrowing money from a lender. It’s expressed as a percentage of the loan amount and determines your monthly mortgage payment. Interest rates can be fixed or variable, depending on the loan type.

10. Loan Estimate

A loan estimate is a document provided by a lender that outlines the terms of the mortgage, including the loan amount, interest rate, estimated monthly payments, and closing costs. Buyers receive this document early in the mortgage process to understand the financial commitment.

11. Mortgage Insurance

Mortgage insurance protects the lender in case the borrower defaults on the loan. It’s typically required for buyers who make a down payment of less than 20%. Private mortgage insurance (PMI) applies to conventional loans, while FHA loans have their own mortgage insurance premiums.

12. Pre-Approval

Pre-approval is the process where a lender evaluates your financial situation and gives you an estimate of how much you can borrow. Pre-approval strengthens your offer when buying a home, as it shows sellers you are serious and financially prepared.

13. Principal

The principal is the amount of money borrowed to buy a home. Your monthly mortgage payment goes toward both the principal and the interest, with more of your payment going to the interest in the early years of the loan.

14. Property Taxes

Property taxes are annual taxes paid by homeowners to the local government. The amount is based on the assessed value of the home and is used to fund local services like schools, infrastructure, and emergency services.

15. Title

The title is a legal document that proves ownership of a property. When you purchase a home, the title is transferred from the seller to the buyer. Title insurance protects against any legal claims on the property that could arise after the sale.

Conclusion

Understanding these common homebuying terms will give you more confidence as you navigate the process. The more familiar you are with real estate language, the better equipped you’ll be to make informed decisions during negotiations and throughout the homebuying journey.