First-time Homebuyers' Glossary
The housing market can feel like a hodgepodge of incomprehensible terms to the average servicemember. For example, most first-time homebuyers have heard of a mortgage and VA loans, but do they really know what it means? And what about the term amortization? Even though that term sounds like a medical procedure, it?s a very important facet of paying off a home.
Real estate agents and loan officers might lob other hard-to-understand terms at potential homebuyers, but if military personnel understand the basics, nothing will get lost in the translation.
Here are a few basic home buying terms and their definitions:
Mortgage -- Most homebuyers know that a mortgage is how a home is financed. The basic definition for a mortgage -- according to the National Association of Home Builders (NAHB) -- is a loan commonly used for buying a home. Mortgage loans are paid back to the lender over a long period of time, and therefore, are described by the time will take for repayment. For example, there are 15 year or 30 year mortgages.
Adjustable Rate Mortgages (ARM) -- A fixed interest rate remains in place during the life of the loan. But with an ARM, the interest rate can change periodically. ARMs are characterized by the time frame for adjustment. In fact, the time frame can range from one year to three, five, seven or even 10 years.
Conventional Mortgage -- A conventional mortgage is not insured or guaranteed by the government. If a conventional loan has a down payment that is 20 percent of the principal or less, then private mortgage insurance or government insurance is required.
Principal -- This is the original amount of money borrowed from a lender or bank for a home that does not include interest or fees. In other words, this is the loan balance.
Interest -- An amount charged to the borrower for using the lender's money. Interest is usually calculated as a percentage of the principal balance of the loan. The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.
Amortization -- The monthly principal and interest payment will pay off the loan in the number of payments stipulated on the note. Monthly payments gradually whittle away the principal balance, slowly at first then rapidly toward the end of the loan, according to Bankrate.com.
Escrow is a way of transferring or exchanging property and/or money using a neutral third party. When a home or property changes hands, the seller of the property transfers the property title to the escrow agent. Similarly, the buyer either transfers funds or has a bank transfer mortgage proceeds to the escrow agent. When all conditions of the purchase agreement are met, the escrow agent assigns the property title to the purchaser and distributes the funds to the seller. The escrow process is covered by significant regulation and protection through the use of licensing and/or bonding.
VA Loans -- This loan is exclusive to military services members including veterans, reservists, and active-duty military personnel. Servicemembers may obtain a loan guaranteed by the Department of Veterans Affairs, which requires little to no down payment.
FHA Loan -- This is a loan offered by the Federal Housing Administration (FHA) that operates several low down payment mortgage insurance programs. FHA insured loans require the homebuyer to make a 3 percent cash contribution to the down payment and closing costs.
Understanding these terms is just the tip of the home buying iceberg. However, all prospective homeowners need to comprehend where their money is going and what resources are available for them.