Financial Terms to Understand Before Buying Your First House

buy a starter home

Now that you have diligently saved up for the down payment check the numbers on what you can afford and attend enough weekend open houses to know that you are ready to own a home. Buying your first home is one of the biggest financial investments we make, and there is no set age to it. You can purchase a home when you are ready, mentally and financially.

Before Buying Your First House

When it comes to the actual buying your first home part, it is both- exciting and overwhelming. It is a milestone, but it can also be terrifying. You will come across a whole new language of finance terms which will only add to the stress. But the good news is buying a home does not have to be daunting in any way. To make the process smoother and reduce confusion, here are some important financial terms to help you understand the real estate and mortgage language.

 1. Adjustable rate mortgage

The adjustable-rate mortgage or ARM is a type of home loan where the rate of interest changes with time. In some cases, it will start with a short period of low-interest rate, but once the time is up, say between three and ten years, the rate will become adjustable, and it will be based on what is happening in the market. When the interest rate begins to decline, you can save money, but your monthly payment will increase if it rises.

2.  Assumable mortgage

This is an uncommon type of mortgage where you do not take out a new loan but simply take over the old mortgage of the seller. It works well when the rate of interest is on the rise. So, if the owner’s mortgage was at 3% and the current rate is 5%, you will be able to save on the interest.

Additionally, you will pay less in fees when buying your first house as you are not getting a brand new mortgage. But there will be a difference in the amount of mortgage balance and the cost of your new home, and you will have to handle it well.

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3. Equity

The equity will tell you how much of the home you own. It is the current market value of the house minus the amount outstanding on the mortgage. When you regularly make monthly payments, the equity will rise. You can make the most of the equity of your home through a reverse mortgage.

It is ideal for homeowners above 62 and helps you to convert the home equity into cash income. You can read through reverse mortgage reviews for a better understanding of how it can be beneficial in the future. 

4.  Fixed rate mortgage

The fixed-rate mortgage is an old-school loan and is very straightforward. Here, you will remain committed to a single rate of interest for the life of the loan. It has its pros and cons but will allow you to plan the monthly payment well in advance. Whether the interest rates drop or rise, you will be stuck with the same rate until the entire loan is repaid.


5.  Escrow

Once your offer is accepted on the home, you will have to keep some amount of money in the escrow account until all the conditions of the contract have been met. Escrow is used to protect the interests of both parties. The escrow agent will hold some cash until the contract is signed.

Once you are a homeowner, the concept of escrow changes. The mortgage lender will be keen to ensure that you pay the property tax and homeowners insurance on time. This is why they collect the extra money from you each month and put it in the escrow account. This money will be used to pay the annual expenses for your home.

6.  Earnest money

The earnest money is used to show the seller that you are interested and serious about buying your first house. All sellers want to ensure that you are not just throwing offers here and there and to show them how earnest you are. It is important to deposit a certain amount of money in the escrow account with the offer.

It could be around 3% of the purchase price, and when the contract is signed, this money will go towards the down payment. If you back out, the seller will keep the money.

These are some of the most important and commonly used terms in the real estate and mortgage industry. It helps to have in-depth knowledge and understanding of them before you sign the contract. If you have any doubts or need clarification, speak to the real estate agent before making any commitments. When you are aware of what you are getting into, you will be in a better position to negotiate the mortgage terms.

buying your first house

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