Homebuyers Glossary: Terms You Should Understand When Buying a Home

Buying a home can be a complex venture – especially if you’ve never done it before. To help you through this process, we’ve compiled a list of essential terms to understand when buying a home.

Amortization

The process of paying off your mortgage gradually with regularly scheduled payments. An amortization table or schedule shows you exactly how much principal and interest you’ll pay each month for the life of your loan, based on the minimum required monthly payment. View an example here.

Closing Costs

Expenses above and beyond the purchase price of your home and separate from your down payment. Closing costs may include attorney fees, title search, government processing fees, title insurance, lender costs and more. Typically, closing costs are about 3% to 5% of your purchase price but will vary depending on your lender. Buyers and sellers often negotiate who pays these costs.

Debit-to-Income Ratio (DTI)

The percentage of your gross income required to pay your monthly debt. Lenders use this information to determine if you can afford a mortgage and if so, how much you can afford. Typically, DTI at 35% or less of your gross income is ideal if you are applying for a mortgage.

Earnest Money

Money paid upfront to a seller or builder to indicate you are serious about buying or building a home. This is not a down payment, although it can be applied to your down payment or closing costs if you complete the sale. If you back out, you usually do not recover your earnest money.

Escrow

An account your lender establishes when you close your mortgage loan. This account gives you the opportunity to set aside funds monthly for expenses that come with home ownership, like taxes and insurance. The escrow company pays those bills out of your account as they come due. A portion of your monthly mortgage payment gets applied to your escrow account, so you don’t have to come up with thousands of dollars at one time to pay property taxes and other expenses in one lump sum.

Equity

The value of your home minus what you owe on your mortgage(s). If your home is valued at $250,000, and you still owe $100,000 on your mortgage, you have $150,000 of equity in your home. Loan-to-Value (LTV)

A ratio that compares the amount of the mortgage you are applying for to the appraised value of the property you want to buy. This number is important to lenders, because it helps them determine if they can sell the home and still break even on their investment if you must foreclose.

Mortgage Points

Fees paid directly to the lender at closing in exchange for a reduced interest rate.

PMI

Private Mortgage Insurance. PMI protects the lender if you stop making payments on your loan. Depending on the type of mortgage you have, you may be required to pay PMI if your down payment is less than 20% of your loan. Usually, you can remove PMI from your loan once your home’s equity reaches 20% (or an LTV of 80%). Ask your lender to ensure the loan type you use will have the PMI automatically drop off or if it’s on the loan for life.

Principal

The amount of money you borrow when you close on your mortgage loan, before interest, taxes and other possible expenses are added to your monthly payment. Paying extra money toward your principal every month helps you pay off your mortgage faster.

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