The Top 5 Terms for First Time Homebuyers - Buying your first home can be a scary process. There are a lot of things that you may not realize and things that you should be prepared for that no one has warned you about. Your first defense against utter confusion when dealing with banks, sellers and realtors is learning the lingo! That’s why we’ve come up with the top five terms that all first time homeowners need to know – but may not totally understand:
A mortgage is the loan that you receive from a lender to actually purchase your home. Mortgages are repaid over monthly installments, so they include the price of your home as well as the interest that you’ll pay the lender for giving you the money.
Your mortgage rate will depend on a number of factors. First off, it may either be a fixed rate mortgage (meaning that it will never change during the life of your loan) or an adjustable rate mortgage (meaning that it will “adjust” or go up and down, depending on what interest rates do during the life of your loan).
2. Principal and Interest
The principal is the amount of money that you originally borrowed from the lender to purchase the home, and the interest refers to the amount of money that the lender is charging you for providing you the money to purchase the home. Typically, lenders use a percentage of the amount you are borrowing from them to determine the amount of interest.
When you’re talking about home loans, amortization refers to paying down your principal over a certain time period. When you make your loan payment, a portion of that payment is applied toward the principal while another portion is applied to the interest. In the beginning of your loan, you typically pay more toward the interest, while toward the end of your loan, you will have paid off the interest and will only have to pay toward the principal.
If a home is in escrow, it simply means that the home is in the process of changing hands. When the home is in escrow, a third party is called in to ensure that everything is being done properly when money is changing hands. The third party ensures that all contractual agreements are in place, before the money goes from buyer to seller. The entire escrow process typically takes around 30 days. The third party typically spends this time making sure that the original owner is, in fact, the true owner of the home and can legally sell the home. The third party protects both sides by making sure that the buyer actually has the funds in place to make the purchase as well.
5. GFE and TIL
GFE is short for “Good Faith Estimate” and TIL stands for “Truth in Lending” – and they’re both important terms to understand when you’re purchasing your first home. GFE is an estimate that your lender gives you that includes the total cost of purchasing your home – including the cost of the home, the interest, closing costs, taxes, fess, and any other costs that you may incur.
TIL was mandated in 1968 to require lenders to disclose all of the costs associated with the loans. This breakdown allows you to see how much money will be going toward your principal balance and how much will go toward your interest each month as well as your percentage rate.
Even though you’ve got the big terms down, don’t be afraid to ask your lender, your realtor, and the seller as many questions as you need to. Do your research, and make sure you feel completely comfortable before you buy your first home. That way, it will be money well-spent!
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