For someone buying their first home, the process can sometimes seem to involve a confusing swirl of strange jargon. Here are six of the most important financial and legal terms that a new buyer might come across, and what they mean.
Adjustable-Rate Mortgage: This is a mortgage with an interest rate that can change over time, based on other economic factors. This can be advantageous while interest rates remain low, but there’s a risk of them increasing and sometimes even becoming unaffordable.
Assumption of Mortgage: This refers to when a homebuyer takes over the already existing mortgage of the seller, and assumes full responsibility for making the remainder of the outstanding payments. The seller is released from further liability with a written agreement.
Closing Costs: A category of miscellaneous payments, in addition to the price of the home itself, required in order to finish the sale and transfer the title from the seller to the buyer. These may include certain taxes, insurance premiums, and service fees for attorneys and escrow companies. They are paid by both buyers and sellers in each transaction.
Contingencies: These are specific provisions included in the sale contract which can alter the terms of the sale if certain conditions or events do or don’t occur before specific dates. These can, for example, void the sale if the buyer is revealed to be financially unable to close the deal, or postpone the closing of the deal if the seller has not yet found a new home to buy.
Escrow: Refers to the practice of having a third party hold certain funds or documents during the process of a sale. Often the buyer deposits those funds into a special account provided by the lender, via a neutral escrow company, most commonly for the purpose of paying property taxes and insurance.
Equity: The value of a homeowner’s real estate, minus the value of any debts against the property, such as the remaining mortgage payments, or any tax liens. As mortgage payments are made and other debts paid off, and as improvements are made to the property, its equity value increases. This is important when it comes time to sell!
There are a substantial number of other important terms to be aware of when making such an important purchase. If you want to know more about the home buying process and its peculiarities, reach out to me with your questions today. I look forward to talking with you!