13 Terms to Learn Before Buying Your First Home

Buying a home can be an intimidating process for first-time buyers who don’t know common mortgage terms. Education is key to buying your first home, so here is a list of commonly used terms that may come up in the loan and homebuying process.

Adjustable-Rate Mortgage

A mortgage loan with an interest rate that fluctuates based on one-year Treasury bills or a specific financial index. The initial interest rate is usually low and then bumps up between one and two points per year. There is typically a cap or ceiling of two points, and the loan also has a lifetime ceiling cap of a specified amount.

Amortization

An amortization schedule is a payment plan which enables a borrower to reduce his debt gradually through monthly payments of principal.

Closing Costs

Closing costs are expenses which buyers and sellers incur to complete the transaction in the transfer of ownership of real estate. These costs are in addition to the purchase price of the property and are items prepaid on closing day.

Closing Day

The day on which the formalities of a real estate transaction are concluded. The certificate of tile, abstract, and deed are generally prepared for the closing by an attorney and this cost is charged to the buyer. The buyer signs the mortgage and closing costs are paid.

Debt-to-Income Ratio (DTI)

The relationship between an individual’s debt payments to the income he or she earns.

property taxes and hazard insurance when they become due by a third party.

Earnest Money

Upon signing the purchase agreement, a homebuyer may make a payment of earnest money to indicate his/her intent of buying the home. If the sale is completed, the earnest money is applied against the down payment. If the sale does not go through, the earnest money will be forfeited unless the purchase offer expresses a refund is in order.

Equity

Equity is the difference between a home’s fair market value and the outstanding balance of all liens the borrower has on the property.

Escrow

Escrow is a financial instrument created in order to store money collected by a lender to pay for

Fixed-Rate Mortgage

A mortgage loan with a constant interest rate for the life of the loan, typically 15 or 30 years.

Mortgage Insurance

This type of insurance is paid by homebuyers with less than 20 percent equity in their home purchase. This insurance protects lenders against borrowers who default on their mortgage.

PITI

PITI stands for principal, interest, taxes and insurance – the components of a mortgage payment.

Points

Sometimes called “discount points”. A point equals one percent of the amount of a mortgage loan and are charged by a lender to raise the yield on a borrower’s loan at a time when money is tight, interest rates are high, and there is a legal limit to the interest rate that can be charged on a mortgage.

Title

In real estate terms, title refers to instruments or documents by which a right of ownership is established (title documents) or to the ownership interest one has in the real estate.

For a full list of mortgage and homebuying terms, check out our mortgage glossary. For an extensive guide on buying your first home, download our free Mortgage 101 Handbook.

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