Buying your first home? You’re probably excited – and maybe a little overwhelmed. There’s a lot of new information to take in, especially when it comes to understanding mortgage terms. It can feel like a whole new language, and that’s totally okay. To make things easier – here are 10 Mortgage Terms to Know Before Buying Your First Home.
1. Mortgage
A mortgage is a loan you take out to buy a home. You borrow a large sum of money from a lender (usually a bank or credit union) and agree to repay it in monthly installments, typically over 15 to 30 years. As you make payments, the amount you owe decreases, and eventually, the loan is paid off, leaving you as the full owner of your home.
2. Down Payment
The down payment is the money you pay upfront when buying a home. This amount is usually a percentage of the total home price, and most lenders want at least 3% to 20% down. A larger down payment reduces the amount you need to borrow, which can lower monthly payments and sometimes even give you a better interest rate.
3. Principal
The principal is the actual amount of money you borrow from the lender to buy the home, excluding the interest and other fees. For example, if you purchase a $200,000 home and put down $40,000, your principal loan amount would be $160,000. Each month, a portion of your payment goes towards reducing the principal.
4. Interest
Interest is the cost of borrowing money. It’s percentage of the principal loan amount and gets added to your monthly mortgage payment. The interest rate determines how much you’ll pay on top of the principal. A higher interest rate means you’ll pay more over the life of the loan, so it’s important to shop for the best rate!
5. APR (Annual Percentage Rate)
APR is a broader measure of the cost of your loan. It includes not only the interest rate but also any additional fees (like loan origination fees, closing costs or insurance fees) that come with the loan. It’s helpful to compare APR’s between lenders to get a better idea of the true cost of the loan.
6. Escrow
Another one of the Mortgage Terms to Know is Escrow, which is an account set up by your lender to pay for property taxes and homeowners insurance. A portion of your monthly mortgage payment goes into this account, and when your taxes or insurance bills are due, the lender uses the escrow money to pay those bills on your behalf. This helps you stay on top of these expenses without having to worry about paying them separately.
7. PMI (Private Mortgage Insurance)
PMI is insurance that protects the lender in case you stop making mortgage payments. If you put down less than 20% on your home, the lender usually requires PMI. This is an additional cost added to your monthly payment. Once you’ve built enough equity (usually when you owe 80% or less of the home’s value), you can request to have PMI removed, which will lower your payments.
8. Amortization
Amortization is the way your mortgage is paid off over time. In the beginning, most of your payment goes toward interest (the cost of borrowing money), and a small portion goes toward paying down the principal. As time goes on, more of your payment will go toward reducing the principal, and less will go toward interest. By the end of the loan, you’ll have paid off both the interest and the principal.
9. Closing Costs
Closing costs are fees you pay when you finalize the purchase of your home. These range from 2% to 5% or higher of the home’s price and includes things like appraisal fees, title insurance and loan origination fees. It’s important to budget for these costs, as they can add up quickly. Your lender will usually give you an estimate of what these will be ahead of time.
10. Fixed vs. Adjustable Rate
Fixed Rate: A fixed-rate mortgage has an interest rate that stays the same for the entire loan term. This makes your mortgage payments predictable and stable, which can be helpful for budgeting.
Adjustable Rate (ARM): An adjustable-rate mortgage has an interest rate that can change after a certain period, such as 5 or 7 years. The initial rate is often lower than a fixed rate, but it can increase (or decrease) over time, which means your monthly payments might change in the future. ARMs can be a good option if you plan to move or refinance before the rate adjusts.
Final Thoughts
Buying your first home is a big milestone – and understanding the basics can make the whole process feel a lot less intimidating. These 10 Mortgage Terms to Know Before Buying Your First Home as just the beginning, but they’ll give you a solid foundation to make smart, confident decisions.
Whether you’re comparing loan offers, talking to a lender, or just trying to make sense of your monthly payments, knowing what these terms mean puts you in control. Remember, asking questions is always okay – this is your future home, and you deserve to understand every step.
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