The purchase of a home is a great investment. Not only is it an appreciating asset, but a home will also give you and your family a place to plant roots. Unfortunately, the process of buying a house can be overwhelming and confusing at times. With the help of a real estate agent and learning a few common terms, the home buying process can be physically, emotionally, and financially rewarding. Here are a few real estate terms that may be confusing you when trying to buy a home.
Escrow
Most people are confused by the term escrow. It is often misunderstood, but it also sounds frightening for many home buyers. Thankfully, once you learn what it entails, you will understand how important and beneficial an escrow account is.
Your escrow account will contain funds to pay for homeowner's insurance and property taxes. These funds will be dispersed at closing. Because your lender wants to protect the value of the asset, the home you are borrowing money to buy, they have a vested interest in collecting escrow to pay for these expenses.
PMI
PMI, or private mortgage insurance, is another common term you may hear from your mortgage lender. This insurance is added to your loan, increasing your monthly payment, to protect the lender if your property goes into default or foreclosure.
Traditionally, you will not need to pay this private mortgage insurance if you place an adequate down payment on the home. However, if you are not able to meet the down payment requirements, your lender will add the PMI to your loan.
You will need to weight out the pros and cons associated with PMI. If you want to hold on to your cash, having the extra monthly fee of PMI will allow you a lower down payment. If you want to have the lowest monthly payments possible, a larger down down payment and no PMI insurance may be a more suitable option.
Lock
Every mortgage will have an interest rate associated with it. When you receive your preapproval, your lender will offer the ability to lock in your rate.
If interest rates are low at the time, locking in your rate is important. Unfortunately, if you receive your preapproval months before you are able to close on the home, locking in the rate may not be possible.
Determine when you will be closing on the home before deciding if you should lock in a rate. Lenders should be able to tell you if interest rates are expected to change dramatically over a period of a few weeks.
By understanding these commonly confused terms, you will have an easier time buying a home. To learn more about finding a home and applying for a mortgage, contact a real estate agent or mortgage broker today.
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