Terms to Know When Buying a Home

Throughout the home buying process you will encounter special terms specific to mortgage and real estate. It can help prospective home buyers (and homeowners who are interested in moving up or refinancing) to know (or review) these terms before starting the process.

Equity: Equity is the difference between what you owe on your mortgage and the value of your home. If you have no mortgage, then you have 100% equity in your home. If you owe $100,000 on your mortgage, and your home is worth $200,000 you have 50% equity in your home. If you owe $230,000 on your mortgage and your home is worth $200,000 you have no equity in your home and are actually “upside down” on your mortgage.

Comparative Market Analysis (CMA or Comps): These are prices and details regarding homes that have recently sold in your neighborhood. Your Realtor will likely prepare one of these for you whether you are buying or selling a home. If you’re selling, it will help give you an idea of how to price your home and which improvements are popular. If you’re buying a home, it will help give you an idea of the price or terms you should offer.

Closing Costs: These are fees that must be paid during the closing process, that do not include the cost of the home. They can include title insurance, commissions, loan origination, points, pre-payment of taxes and insurance and so on. Closing costs often average 2-4% of the home’s selling price.

Inspection: As a buyer, you obviously want to know the precise condition of the home, and a professional inspection will tell you this. As a seller, it can be nerve wracking to have someone going over your home with a fine tooth comb. But it is a necessary and common part of the transaction. The inspector will check out all major components of the home including the electrical systems, water, appliances, the foundation, drainage, the roof and the attic.

Earnest Money or Escrow: This is the amount of money the buyers put down as a deposit to basically hold the house until the negotiations (and eventually closing) are complete. It is typically covered in the form of a personal check and yes, the check will be cashed. (It goes towards the price of the home as well.) Note that the money your lender may require you to put up front in a reserve to cover several months of taxes and insurance is also called escrow.

FHA Loan: Contrary to popular opinion, this loan is not just for first time home buyers. The main restriction is the loan limits that are placed on buyers according to county. If you have less than stellar credit, or only a small down payment, you may want to consider an FHA loan.

Good Faith Estimate: The Real Estate Settlement Procedures Act (RESPA) requires any mortgage broker or lender to provide the borrower with a list of fees, closing costs and other expenses associated with the loan. The GFE must be given to the borrower within 3 business days of finding a property and applying for a loan.

Private Mortgage Insurance: This is typically required by the lender when the borrower has less than 20% for a down payment. The insurance payments (PMI) are rolled into the monthly mortgage payments and cover the lender in case of default. You can often drop the insurance after you’ve paid off enough of the mortgage and/or your home increases in value to the extent that you have 20% equity in the home.

Origination Fee: This is the fee the lender charges to cover administrative costs of making the loan. It often equals 1-2% of the loan.

Points: Borrowers often have the option of paying points (or even negotiating with the seller to cover points) at closing to lower the monthly payments or interest. Each point is equal to 1% of the amount of the loan. On a $100,000 loan, one point would equal $1,000 and two points would equal $2,000 for instance.

Remember that your Realtor and Mortgage Professional are great assets for you in explaining all the terms that go along with buying, selling and refinancing a home, so don’t hesitate to ask us to explain something you’re unsure about or don’t understand.


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