If you’re thinking of buying a home, you might feel overwhelmed by all the jargon and acronyms that lenders use. But don’t worry, we’re here to help you understand the most important terms you need to know before you sign on the dotted line. Here are the top 5 home financing terms you should be familiar with:
1. APR: This stands for annual percentage rate, and it’s the total cost of borrowing money for a year. It includes the interest rate and any fees or charges that the lender adds to the loan. The APR is usually higher than the interest rate, so make sure you compare different offers based on the APR, not just the interest rate.
2. PMI: This stands for private mortgage insurance, and it’s a type of insurance that protects the lender in case you default on your loan. You might have to pay PMI if you make a down payment of less than 20% of the home’s value. PMI can add hundreds of dollars to your monthly payment, so try to avoid it if you can.
3. DTI: This stands for debt-to-income ratio, and it’s a measure of how much of your income goes towards paying your debts. Lenders use this ratio to determine how much you can afford to borrow and what your monthly payment will be. The lower your DTI, the better your chances of getting approved for a loan. A good rule of thumb is to keep your DTI below 36%.
4. Closing costs: These are the fees and expenses that you have to pay when you finalize your loan and get the keys to your new home. Closing costs can include things like appraisal fees, title insurance, origination fees, taxes, and more. Closing costs can vary depending on the lender, the type of loan, and the location of the property. You can expect to pay between 2% and 5% of the home’s value in closing costs.
5. Escrow: This is a third-party account that holds money for a specific purpose until certain conditions are met. For example, when you make an offer on a home, you might have to put some money in escrow as a good faith deposit. The money will be released to the seller once the deal is closed. Another example is when you pay your property taxes and homeowners insurance as part of your monthly mortgage payment. The lender will keep that money in escrow until it’s time to pay those bills.
These are just some of the terms you’ll encounter when you apply for a home loan. If you have any questions or need more clarification, don’t hesitate to ask your lender or a trusted real estate agent. They can help you navigate the process and find the best financing option for your situation.
