Daunting yet an exciting experience, yes we’re talking about purchasing a new home. It’s a journey where every one of us has to go through several other steps. And one of them is to acquire a home loan which is the biggest financial moment for every individual. However, knowing about some basic home loan terms can assist you in making informed decisions along the way.
Here’s a list of 7 home loan terms every homebuyer should know:
Down Payment
It’s the amount of money that you need to pay in cash when purchasing a home. A larger amount of down payment can reduce the amount you need to borrow leading to more favourable interest rates. However, the minimum amount for a down payment may vary on the loan type.
Interest Rates
Interest rates are a significant factor influencing your monthly mortgage payment. A lower interest rate means you ought to pay the lower monthly payments. Several factors affect interest rates such as your credit score, loan type and current market conditions. By discussing with several lenders you can secure a favourable interest rate as per your financial situation.
Loan Term
This is about the duration of time you have to fully repay the loan, usually either 15 or 30 years. Choosing shorter loan terms will result in higher monthly payments, but it will enable you to pay off the loan and become a homeowner more quickly. However, opting for longer loan terms can lead to reduced monthly payments.
Closing Costs
To close the home purchase process, it is necessary to understand the concept of closing costs. These are the costs associated with finalising the mortgage loan charged by various lenders which include loan origination fees, appraisal fees, title fees, escrow fees etc.
Private Mortgage Insurance (PMI)
If your down payment is below 20% of the purchase price, then you’ll be required to pay PMI. This is an insurance premium that acts as a protective layer to the lender in case you are unable to repay the loan. Even though PMI may seem like an additional cost it allows lenders to offer mortgages to borrowers at lower down payments.
Credit Score
A credit score is a three-digit number that reflects your credit history which means how you have managed debt. It is a crucial aspect of the home-buying process as it decides whether you qualify for the loan or not. Knowing your credit score can empower you to negotiate the best possible deals on your mortgage.
Home Appraisal
Home appraisal is the process of unbiased assessment of a property’s value conducted by a licensed appraiser. Lenders typically request an appraisal to verify that the value of properties aligns with their purchase prices.
Understanding home loan terms can be overwhelming, especially for first-time home buyers. However, by familiarising yourself with these terms you can feel confident throughout the buying process!
