10 Homebuying Terms Everyone Should Know

Buying a home is exciting, but it’s easy to get overwhelmed if you’re not familiar with the homebuying vocabulary. One of the best things you can do as a homebuyer is learn some basic real estate and financing terms.

Here is a list of frequently used homebuying terms and their definitions.

What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage is a type of mortgage with an interest rate that adjusts after an initial period. The rate can also reset periodically over the life of the loan. ARMs usually give you lower monthly payments at the outset, but over time your payments will change with market interest rates. Learn more about ARMs.

What is amortization?

Amortization describes the process of paying off your mortgage in equal installments over the term of your loan. An amortization schedule shows every monthly payment you’ll make and how it contributes to building home equity. An amortization schedule also shows how much your home really costs at the end of the term. 

What is an annual percentage rate (APR)?

APR is the annual rate it costs you to borrow over the term of the loan, including the interest rate, points, fees and other charges you are required to pay.  The APR is the bottom-line number you can use to shop and compare rates among lenders. Be sure you understand the difference between APR and interest rate.

What is an appraisal?

An appraisal, usually performed by a qualified appraisal professional, is an analysis that estimates the value of a property by taking current market values of similar homes and the quality of the home into account. An appraisal protects you and the bank by making sure the home’s value matches the agreed upon sale price. Learn more about home appraisals.

What is closing?

Closing on your mortgage is the last step of the real estate transaction. At closing, you will sign the final mortgage documents, receive title to the house and pay all closing costs.  After a successful closing, you have a new house to call home. 

What is a credit score?

Your credit score is a three-digit number — ranging from 350 to 850 — that represents and summarizes information from your credit report, indicating your likeliness to repay your debt.  Your credit score plays a significant role in getting approved for a loan and the interest rate you are charged. Learn more.

What is equity?

Equity is the difference between how much your home is worth and how much you owe on your home. If you owe $100,000 on your house but it is worth $130,000, you have $30,000 of equity.

What is a fixed-rate mortgage?

A fixed-rate mortgage has an interest rate that does not change during the entire term of your loan.  This is the most common type of mortgage, giving you certainty and stability over the life of the loan.  

What are points/discount points?

When you’re shopping around for a home loan, your lender may offer you the option to buy discount points. Points are upfront payments typically used to reduce your mortgage interest rate on the loan. By lowering your interest rate, you’ll likely end up with a lower monthly payment. A point is equal to 1% of your loan amount, or $1,000 on a $100,000 loan. 

What is private mortgage insurance (PMI)?

PMI is a monthly premium required by your lender if your down payment is less than 20%. It protects the lender if you are unable to pay your mortgage. 

Source: My Home by Freddie Mac – 10 Real Estate Terms Every Homebuyer Should Know – April 22, 2021. This article is for informational purposes only.

Want to learn more? We have a glossary full of common mortgage terms, take a look. Or contact us to ask any questions you might have.

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