Understanding financial terms is crucial for anyone looking to buy a home. We have listed some key financial terms you as a homebuyer should know:

1. Mortgage: A loan provided by a lender to finance the purchase of real estate. The borrower agrees to repay the loan with interest over a specified period.
2. Down Payment: The initial payment made by the buyer toward the purchase price of the home. It’s typically a percentage of the total purchase price, with 20% being a common benchmark.
3. Interest Rate: The percentage charged by a lender for borrowing money, typically expressed annually as a percentage of the loan amount. It directly affects the monthly mortgage payment.
4. Principal: The original amount of money borrowed in a loan. Payments reduce the loan’s principal balance.
5. Amortization: The process of paying off a debt, such as a mortgage, through regular payments over time. Payments typically cover both principal and interest, with the proportion of each changing over the loan term.
6. Closing Costs: Fees and expenses associated with finalizing a real estate transaction. They may include loan origination fees, appraisal fees, title insurance, and other charges.
7. Pre-Approval: A process where a lender reviews a borrower’s financial information to determine the maximum amount they can borrow for a mortgage. It’s more comprehensive than pre-qualification.
8. Pre-Qualification: An informal assessment of a borrower’s finances to estimate how much they may be able to borrow for a mortgage. It’s typically based on self-reported information and doesn’t involve a thorough analysis by the lender.
9. Private Mortgage Insurance (PMI): Insurance required by lenders for borrowers who make a down payment of less than 20% of the home’s purchase price. It protects the lender in case the borrower defaults on the loan.
10. Escrow: A financial arrangement where a third party holds and regulates payment of funds required for two parties involved in a transaction. In real estate, it’s commonly used to hold the earnest money deposit and handle the transfer of funds and documents between the buyer and seller.
11. Appraisal: An estimate of the value of a property conducted by a licensed appraiser. Lenders require appraisals to ensure the property’s value is sufficient to support the loan amount.
12. Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant throughout the loan term, providing predictable monthly payments.
13. Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that can change periodically based on market conditions. Monthly payments may fluctuate, potentially making budgeting more challenging.
14. Closing Disclosure: A document provided to the borrower by the lender before closing that outlines the final terms and costs of the mortgage loan.
15. Home Equity: The difference between the market value of a home and the outstanding balance of all liens (e.g., mortgage, home equity loans) against the property. It represents the homeowner’s financial interest in the property.

Understanding these financial terms can help homebuyers navigate the complex process of purchasing a home and make informed decisions about their mortgage options.