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Buying your first home is an exciting milestone, but it can also be overwhelming, especially when you’re faced with unfamiliar real estate jargon. Phrases like “escrow” or “contingency” might make your head spin, but understanding these terms is an important step in feeling confident about the home-buying process.
This guide will walk you through 25 essential real estate terms you need to know as a first-time home buyer. By the end, you’ll feel more prepared to make informed decisions and tackle the process with ease.
Down Payment
The down payment is the upfront amount of money you pay toward the purchase of a home. Typically, this is expressed as a percentage of the home's price (e.g., 10% or 20%). For example, if you’re buying a $200,000 home with a 10% down payment, you’d need to pay $20,000 upfront. Some first-time buyer programs allow for lower down payments, making homeownership more accessible.
2. Mortgage
A mortgage is a loan you take out to finance your home purchase. You’ll repay the lender in monthly installments, which include both the principal (the loan amount) and interest (the cost of borrowing).
3. CMA
Comparative (or competitive) market analysis is a report that shows prices of homes comparable to a subject home and that were recently sold (typically within the last six months).
4. Principal
Just like in school, principal is a key term! It refers to the original loan amount you borrow before adding interest. For example, if you take out a $250,000 loan, that’s your principal amount.
5. Interest Rate
This is the percentage rate your lender charges annually for borrowing money. A lower interest rate can save you thousands over the life of the loan, so it pays to shop around.
6. Closing Costs
These are fees and expenses you’ll pay on closing day to finalize the home purchase. They often range from 2% to 5% of the home's price and can include things like loan origination fees, appraisal fees, and title insurance.
7. Fixed-Rate Mortgage
With a fixed-rate mortgage, your interest rate stays the same for the life of the loan. This provides stability, making it a popular choice for first-time buyers.
8. Adjustable-Rate Mortgage (ARM)
Unlike a fixed-rate mortgage, an ARM has an interest rate that can fluctuate over time. While the initial rate may be lower, it can increase later, which might impact your monthly payments.
9. Private Mortgage Insurance (PMI)
If your down payment is less than 20% of the home’s purchase price, your lender may require PMI. This insurance protects the lender if you default on your loan.
10. Escrow
Escrow is a third-party account that holds funds for specific purposes, like property taxes and homeowners insurance. Your lender may set up an escrow account for these payments as part of your monthly mortgage total.
11. Appraisal
An appraisal is an assessment of a home's value conducted by a licensed appraiser. It ensures that the property's price aligns with its market value.
12. Buyer's Agent
The licensed real estate agent who represents the buyer in the purchase of a property.
13. Listing Agent
Also known as the seller’s agent, this is a licensed real estate agent who represents the homeowner selling their property.
14. Offer
Once you’ve found your dream home, you’ll submit an offer to the seller. This is your proposal to purchase the property at a specified price and with certain terms. Once the sellers have signed the offer, it becomes a ratified contract of sale which is a legally binding contract outlining the purchase of the property.
15. Contingency
Contingencies are conditions that must be met for the sale to proceed. Common ones include financing contingencies and home inspections to ensure there are no major issues.
16. Home Inspection
A home inspection is a professional evaluation of a property’s condition. It can uncover potential issues, such as roof leaks or plumbing problems, giving you the chance to negotiate repairs or back out of the deal.
17. Earnest Money (or Good Faith) Deposit
Earnest money is a deposit you provide to show the seller you’re serious about the purchase. This amount is credited toward your down payment or closing costs if the sale goes through.
18. Title
Title refers to legal ownership of the property. Before closing, a title company will conduct a title search to ensure there are no legal claims (like unpaid taxes) against the property.
19. Title Insurance
This type of insurance protects you and your lender against losses in case there are disputes or claims relating to the property's title.
20. Amortization
A term that refers to the process of repaying your mortgage over time through monthly payments. At first, more of your payment goes toward interest, but over time, you’ll pay down more of the principal.
21. Homeowners Association (HOA)
If you're buying in a planned community or condo, you may have to pay HOA fees. These go toward the maintenance of shared spaces and amenities.
22. Closing
Closing is the final step in the home-buying process, where ownership of the property is officially transferred to you. This is when you’ll sign all necessary documents and pay your closing costs.
23. Debt-to-Income Ratio (DTI)
DTI is a measure lenders use to assess whether you can afford a mortgage. It’s the percentage of your monthly income that goes toward debt payments, and lower ratios are more favorable.
24. Equity
Equity is the difference between your home’s market value and the amount owed on your mortgage. Building equity means increasing your ownership stake in the property.
25. Refinancing
This is the process of replacing your current mortgage with a new one to secure a lower interest rate, reduce monthly payments, or change loan terms.
Your Journey Begins Here
Home buying doesn’t have to feel like a maze of unfamiliar terms and confusing processes. Now that you’re equipped with these essential real estate terms, you can confidently take the steps toward buying the home of your dreams. Happy House Hunting!
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