The world of homebuying is not an easy one with all the vernacular to learn and potential landmines that one is sure to encounter. How can homebuyers make the best financial decisions for themselves if they don’t know what they’re agreeing to in the process? It can be tricky. That’s why we would like to present to you five mortgage closing terms that every buyer should know and add to their home-buying dictionary.
- Principle (and Interest)
Let’s start simple–a term that you probably already know from other financial transactions–because this is one of the most important words to know before buying your house. When taking out a loan, the amount you borrow up-front is known as the principle. As you make your house payments your principle goes down. Once your principle reaches $0, you own your house. In theory.
In addition to the principle, you will also need to pay interest, which is the fee charged for borrowing money. There are different interest rates and that effects how the interest accrues, so be sure to talk to a mortgage expert before agreeing to an interest rate.
When you make a mortgage payment only some of it goes toward paying down the principle. In fact, especially in your early payments, a portion of the money you pay goes more towards your interest payments. This is called amortization.
It is annoying to see so much of your money going towards paying off your interest rather than the principle, so consider making a larger down payment upfront (also known as points) or choosing a shorter loan rather than the traditional 30-year: your payments may be greater, but your interest rates would be lower—allowing you to save in the long run.
- Title Insurance
Sometimes during the process of buying a home there are unexpected complications with the title: perhaps it is damaged or has defects. Who will protect you during your decision to buy a house? Enter title insurance. Title insurance protects both you and your lender in case the title is in any way damaged. An undamaged title verifies that the seller genuinely owns the property and can sell it. If the title’s damaged, the insurance company may be responsible for the legal damage (depending on the policy).
After you’ve moved into your new house and start making payments on it you are paying that money to your lender (most likely a bank). This is because the lender is really the owner. A lien exists to protect the lender from non-payment in case the borrower does not repay a loan. When buying a home, a lien can be good for you as the house has collateral, which is less risky for the lender—this means lower interest rates. Make sure there is no outstanding debt on your home, though, as you may become responsible for this debt.
As it comes time for the loan to be due, it is has reached maturity. On the date prearranged between you and your lender, the loan will be repaid. Maturity dates classify bonds into short-, medium-, or long-term loans. When you’ve paid back your loan and it has reached maturity, you will own your house!