When making the decision to become a homeowner, the first thing you’ll likely do is begin to research the process and familiarize yourself with all the terms that you’ll be hearing throughout your journey. Being informed and knowledgeable about these terms will help you make the best home-buying decision for you and your family.
Below are definitions of some of the most common terms you’ll hear while making the transition from renter to homeowner:
Pre-Qualification: One of the initial determinations o made by a lender, bank or mortgage company that lets a prospective homebuyer know if they can qualify for a mortgage, and if so the price range of homes that they should be able to afford. This information is not guaranteed and should be looked at as more of a starting point. Pre-qualification information is provided after a lender, bank or mortgage company takes a look at your finances, like income and expenses, to estimate what a person can afford to purchase.
This term isn’t to be confused with a pre-approval, which is an in-depth look by the lender, bank or mortgage company at your financial standing and credit report that results in giving you approval for a specific mortgage amount.
Deposit: The amount of money that you will give to the seller of the home at the time you sign a contract to purchase a home. This is not to be confused with the Down Payment, which may be more or less than the deposit.
Down Payment: The amount of money that you, the homebuyer, will contribute towards the purchase of your home, which is paid at the time of closing. The higher your down payment, the lower your principal mortgage amount will be, and thus the lower your monthly payment will be. Some of our customers may be able to purchase a home with little or no down payment required, depending upon the type of mortgage financing they qualify for.
Closing Costs: All the costs that must be paid at closing, including items such as loan origination fees, discount points, appraisal, survey, underwriting fees, title search fees, title insurance. Some of these costs may be paid by you, and some may be paid by the seller. If you close with the Starlight Advantage Program, certain of these fees may be paid by the participating lender and/or Starlight Homes.
Principal: This term can refer to either the initial amount of a loan or the amount still owed on that loan. For example, if your loan is $100,000, your principal is $100,000. If you pay back $25,000 of that loan, the remaining $75,000 that’s left to pay is also referred to as the principal.
Annual Percentage Rate (APR): The APR is a broader measure of the cost to you of borrowing money. The APR reflects not only the interest rate but also the points, mortgage broker fees, and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Mortgage: A mortgage is the documentation used to secure a loan. It is “a security instrument that you give to the lender, a document that protects the lender's interests in your property,” according to TheBalance.com.
Fixed-Rate Mortgage**: A type of mortgage that sets the interest rate at a percentage that won’t change throughout the life of your loan. The portion of the monthly payment associated with principal and interest on this type of loan also does not change, (however taxes and insurance will change throughout the life of the loan) and can be beneficial for locking in a low rate if the market forecast shows that interest rates will climb over the years.
Adjustable-Rate Mortgage (ARM)**: A type of mortgage with an interest rate applied to what’s owed that may change over time or at the end of a certain period of time, depending on what the market dictates. This mortgage may be attractive if the market trends show that interest rates are not expected to increase exponentially over time or if rates are high going in, but trends show they are expected to decline.
Homeowner Warranty: A warranty on the home that provides coverage for certain defects that the home or components of the home may face over a set period of time.
These are just a few of the important terms you may hear throughout your homebuying journey. For a more complete understanding of the homebuying process, contact us—we’d love to guide you home.