A Homebuyer’s Glossary: 13 Terms to Know
APR, FRM, PMI … what do they mean?
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.
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.
FRM Versus ARM
Fixed rate mortgage (FRM): A home loan with an interest rate that stays the same—keeping your payment similar throughout the life of the loan.
Adjustable rate mortgage (ARM): A home loan with an interest rate that is adjusted periodically—meaning the interest rate, and therefore your payments, could increase or decrease.
Loan Origination Fee
Money paid to the lender as compensation for processing a loan application. It covers the preparation of documents, credit checks, inspection and appraisal of the property.
Tip: The amount of the loan origination fee is usually stated as a percentage of the loan—typically 0.5% to 1% of the loan amount.
Also called a discount point, it equals one percent of the dollar amount of the mortgage loan. Paying points directly to the lender at closing—called buying down the rate—is one way to lower the interest rate on the loan.
Tip: One-eighth of a point, or 0.125% of the loan amount, is usually the smallest increment that can be bought.
Principal Versus Interest
Principal: The amount of money the lender is loaning you.
Interest: The fee you pay to the lender for borrowing that money.
Private Mortgage Insurance (PMI)
An insurance policy written by a private company that protects the lender if you stop making payments and go into foreclosure. The cost is usually added to your monthly mortgage payment.
Tip: If your down payment is less than 20% of the purchase price, you’re legally required to have PMI.