Home Finance Terms Every Homebuyer Should Know

Home Finance Terms Every Homebuyer Should Know

Are you new to home financing? Dealing with mortgages and lenders can seem like a whole different language. Dream Finders Homes wants to make it easier on you. Here are definitions of the home finance terms every homebuyer should know.


Adjustable-rate mortgage (ARM): A mortgage with an interest rate that can change over the period of its term. An ARM often offers a low interest rate in the beginning of the loan term. It then changes in relation to market conditions, but will not exceed the rate limit—known as a “cap”—determined at closing.


Annual percentage rate (APR): The interest rate of your loan is combined with the fees charged for the loan, which is represented in a percentage rate. The APR is NOT the same as the interest rate of your home loan.


Appraisal: Performed by a licensed appraiser, this document conveys the estimated value of the property. Lenders will only finance the appraised value of a home, so if the appraisal is lower than the purchase price, the buyer must pay the difference.


Closing: The legal transaction of the purchase of a home includes signing the necessary documentation and paying any fees required at that time. 


Closing costs: Fees incurred from purchasing a home can include the down payment, property tax, and fees for the survey, loan origination, insurance, attorney, closing or escrow, HOA, and title search, among others. Your lender will provide a detailed list of the closing costs so you are prepared for closing.


Debt-to-income ratio (DTI): A lender looks at the amount of debt you have (e.g., credit cards, loans) in relation to your income to help determine how much you can afford to borrow. The DTI required to qualify for a loan will depend on the type of loan you’re applying for, like a conventional loan, FHA, or VA.


Down payment: When you’re financing your home with a mortgage, lenders require a specified amount of money on the purchase of your home at closing. The amount ranges from 5% to 20%, depending on the loan. Higher down payments can often lower the interest rate of your loan.


Equity: The difference between the fair market value of your home and the balance of the mortgage represents your equity, which fluctuates with changes in your home’s value.


Escrow: Funds are held in a neutral, third-party account and paid to the appropriate parties and the required dates. For example, funds held in escrow could be released at closing, to pay home insurance and property taxes, or for other liens.


Federal Housing Administration (FHA) loan: The U.S. government’s Federal Housing Administration provides loans with less strict requirements for credit and down payments, than for conventional loans, intended for people who don’t qualify for a conventional loan. Not all homes qualify for FHA loans, so let your agent know that you’re focused on this type of home for sale.


Fixed-rate loan: The interest rate for this mortgage remains the same over the course of the loan. You might pay a slightly higher interest rate as compared to an ARM, but you have the peace of mind that the percentage stays the same.


Home Owners Association (HOA): Some communities have a governing body that manages the neighborhood’s covenants and maintenance of common areas. Homeowners in these communities pay an HOA fee, as determined by the association.


Interest: Your lender charges you a specified percentage of the money borrowed. The rate you are offered is determined by various factors, including your credit history and credit score.


Loan-to-Value Ratio (LTV): LTV shows the amount borrowed in relation to the home’s appraised value or purchase price of real property. 


Lock-in period: You can secure (lock in) the interest rate for your home loan during a particular period prior to closing, usually 30 to 90 days, depending on the lender.


Market value: The current value of your home fluctuates with demand and housing prices.


Points: Points refer to a percentage point and are sometimes offered as a discount or credit on the purchase price or loan amount, and paid at closing.


Principal: The amount of money you borrow, not including interest, is the principal amount on your loan. 


Principal Interest Taxes and Insurance (PITI): When comparing estimated monthly payments, a PITI shows what your mortgage payment would be, not including other fees, such as HOA. It’s also known as “monthly housing expense”. Use this mortgage calculator to get an idea of what you might be paying.


Pre-approval: While not a guarantee of mortgage approval, pre-approval shows that a buyer is likely to be approved for a loan up to the amount specified on the pre-approval letter provided by the lender. 


Private mortgage insurance (PMI): If your down payment represents less than 20% of the home’s purchase price in a down payment, some lenders require PMI to offset their risk. The monthly payment is usually included in the mortgage.


Term: The length of your loan is the term. 


Title: The documented evidence of a property’s insurance is included in the closing.


VA loan: Current and former members of the U.S. military may be eligible for a low-interest mortgage with a low or zero down payment home mortgage. These government loans are offered through lenders and backed by the U.S. Department of Veterans Affairs.


The mortgage and financing professionals at Dream Finders Homes are ready to guide you through the process of financing your new home or townhome. Look at the new homes for sale right now and what’s coming. Then reach out to Dream Finders Homes to get started!