Have you ever thought your real estate agent and lender were speaking a foreign language? It’s a common feeling among first-time homebuyers, who might not be familiar with the terminology that goes along with the process—from getting a mortgage to closing on your new house.
Before you make an offer, brush up on the lingo with our homebuyer’s glossary.
A chart that lists all the payments you’ll make over the life of your loan, breaking down the portions of your payments that will go toward principal and interest along the way.
Annual Percentage Rate (APR)
A number that represents the total cost of a loan, factoring in the interest you’ll pay as well as all the fees associated with getting the loan.
Tip: APR is different from the interest rate, which doesn’t factor in fees and only calculates what your monthly mortgage payment will be. Learn more about APR in this story.
The fees, taxes and other charges paid at the closing of a real estate transaction. These costs are separate from the down payment and purchase price, and include things like loan origination fees, credit report fees and attorney fees.
Tip: Closing costs usually add up to between 2% and 5% of the purchase price and are the responsibility of the buyer.
All your monthly debt payments divided by your gross monthly income. Lenders use this percentage to evaluate your ability to repay a loan—this ratio can help determine how much you’re approved to borrow.
Tip: Most lenders want your debt-to-income ratio to be at or below 45%.
Also known as a good faith deposit, this payment is made as a security deposit to show you’re serious about purchasing a home. Unlike a down payment, which is a promise to the lender, an earnest money deposit—typically around 1% to 3% of the sale price—is a promise to the home seller.
Tip: If you’re shopping in a competitive real estate market, an earnest money deposit of 5% may be necessary.
An account set up by the lender for the buyer to deposit money for taxes, insurance and other payments that need to be made over the life of your loan.
Tip: An escrow account ensures that property tax and homeowners insurance payments are paid on time, automatically, and helps homeowners avoid late fees or other penalties.