APR (Annual Percentage Rate)
The total cost of a loan, shown as an annual interest rate.
APR is a combination of the interest rate charged by your lender, plus any fees (like mortgage insurance, origination costs, or points) you may be charged for. This number is useful for comparing the cost of different loans on an apples-to-apples basis. The lowest interest rate isn’t always the least expensive option!
ARM (Adjustable-Rate Mortgage)
A type of mortgage with a variable interest rate.
Typically fixed for the first 5 to 10 years of the loan, your interest rate will then begin to move (up or down) in relation to then current rates. ARMs usually have lower starting rates than other mortgages and can be a good option if you plan to move out of your home within the initial term. Found your forever home? A fixed-rate mortgage may be a better fit.
Amortization
The repayment schedule for a mortgage.
Loan payments include interest (what it costs you to borrow the money) and principal (the amount of money you borrowed). The monthly amount is based on a schedule that culminates with you fully owning your home at the end of a specified period (e.g. 15 or 30 years).
Appraisal
The estimated value of a property based on an independent, professionally licensed appraiser's analysis.
The appraised value may not be the same amount as the selling price. Lenders typically require an appraisal before issuing a mortgage to make sure the property value adequately exceeds the amount being borrowed.
Assessment
The value of a property assigned by a governing authority to levy property taxes.
The amount can differ from your purchase price and/or the appraised value when you bought the home. Think your assessment is too high? Consider appealing to your local assessor's office. A lower assessment will help you save on taxes!
Buyer’s agent
A professionally licensed real estate expert who is legally obligated to represent your best interests throughout the process.
Your agent will help you find a home, submit an offer, negotiate, close, and almost everything else in between. Their fees are typically paid for by the seller, not you. Finding a reputable agent is often the first step to take once you are ready to start house hunting.
Closing
The last step in the home buying process where the property is legally sold and transferred from the seller to the buyer.
This is the day you get your keys! You, your agent and/or attorney, along with the seller and their agent or attorney will technically finalize the purchase. At this point, you officially assume the loan obligation, pay closing costs, and receive the title from the seller. Congrats!
Closing costs
All the cash, in addition to your down payment, required to close when financing and purchasing a home.
These costs typically run between 2% and 5% of the loan value and include origination expenses, discount points, escrow requirements, attorney’s fees, and other miscellaneous charges. No worries, Gravy Rewards are here to help cover these costs for you.
Comparable market analysis
A way to estimate the value of a house based on the sale price of other similar, or comparable, properties.
Recently sold houses in the area with approximately the same amenities are a useful tool when determining a fair market value. This analysis is an important input when you submit an offer, a seller determines the list price for their home, and for appraisers and assessors.
Contingencies
Conditions that must be met before a home sale can occur.
The two most common contingencies are a satisfactory home inspection (to make sure no serious defects turn up) and a financing contingency (you are released from the contract if you cannot obtain a mortgage). Getting pre-approved for a mortgage will make your bid more attractive to sellers, check out our awesome lender partners!
Credit score
The output of a complex formula designed to predict, based on the past, how likely someone is to make on-time re-payments of money they borrow.
Lenders use credit scores to approve you for credit cards, auto loans, personal loans, other types of credit, and mortgages. Landlords often use credit scores when you apply for a new apartment. Watch our ‘Build your credit’ story to learn how to track (and improve) yours.
DTI (Debt-to-Income)
The percentage of a person’s monthly income (before taxes) that goes toward debt payments like rent, credit cards, car leases, and student loans.
Your DTI ratio is a way that lenders measure your ability to repay debt.
A number less than 40% is recommended, and the lower the better!
Deed
A legal document that provides proof of property ownership.
At closing, the deed to the property will be signed over to you by the seller, at which point you formally take ownership (or title). Shortly after closing, the deed is filed with, and recorded by, your local government into public record.
Down payment
The portion of the sale price that is paid up-front in cash rather than being financed with a mortgage.
Down payments typically range from 3% to 20% of the home value, but if yours is below 20%, you may be required to get PMI and/or pay higher interest rates.
That said, the average down payment for a first time homebuyer is 6% to 8%, or about $20K for a $300K house.
Earnest money
A deposit paid by the buyer after signing a purchase agreement to show their good-faith intent to buy the property.
You should expect to pay around 1% to 3% of the sale price, which is then put in escrow until the deal is complete. This money will be applied toward the down payment and/or closing costs, or depending on the circumstances, returned to you if the purchase is not completed.
Equity
The amount of ownership a homeowner has in their property.
Equity is calculated by subtracting the outstanding principal balance on your mortgage from the market value of the home. At purchase, your equity typically equals your down payment.
Escrow
Money held by a third party for safekeeping until a particular condition is met.
Once your offer is accepted, you may need to deposit earnest money into escrow until closing, at which point it is used as part of the down payment (or returned). Part of your closing costs, and then your monthly mortgage payments, will be held in escrow by the lender to pay for future taxes and insurance on your behalf.
Fixed-rate mortgage
A type of mortgage with a single interest rate for the duration of the loan.
Your payments remain the same for the entire term of the mortgage, typically 30 or 15 years, regardless of prevailing interest rates in the market. If interest rates drop, you may have an opportunity to refinance and save money. Plan to move within 10 years? An adjustable-rate mortgage may be a better fit.
HOA (Homeowners Association)
A select group of owners within a community that enforce agreed upon rules and make decisions about the upkeep of common property and services.
If you buy a single-family home within a planned development, a condo, or townhouse there may be an HOA. Typically, there is a monthly or annual fee that all homeowners must pay to cover maintenance and communal project costs.
Homeowners insurance
Insurance that protects your property in the event of damage like a fire or break in.
Unlike renters insurance, which is a good idea to have, but not always mandated by landlords, mortgage lenders almost always require insurance. Average costs are around $110 per month, but can be higher or lower depending on the value of the property. Be sure to shop around for the best coverage and rate!
Inspection
A professional examination of a home conducted on behalf of a buyer during the purchase process to uncover any critical flaws in the property.
Key focus areas are plumbing, HVAC, appliances, the roof, the foundation, structural stability, and other potential hazards like mold, radon, lead, and asbestos. A professional inspection is a common contingency prior to closing, and you should insist on having one.
Interest rate
The fee charged by lenders for borrowing money.
Interest rates are expressed as a percentage of the outstanding loan amount that you are required to pay on an annual basis. Interest is paid in addition to repaying the principal amount of the loan. For example, 1% interest on a $100K principal balance, would equal an ~$83 monthly payment ($100K x 1% = $1K / 12 months = $83.33).
LTV (Loan-to-Value)
The size of a mortgage divided by the sale price (or the appraised value of the property if it is lower).
For example, if your down payment is 10%, your LTV is 90%. Lenders use LTV to assess risk. An LTV of 80% (20% down payment) or less will help you qualify for the best rates, but many lenders will accept ratios at or above 95%.
Lien
A legal claim of money against a property where the property can be taken if a loan is not repaid.
When buying a home, you will have a title search conducted to make sure there is no surprise money owed on, or claims against, the property or previous owner. Not all liens are bad. The first lien on a house is your mortgage!
Loan servicer
The company that manages a loan and collects the monthly mortgage payments.
Your loan servicer may not be the same financial institution that you initially received your mortgage from. You will be given notice if the servicer ever changes. This is quite common, but don’t worry, all the terms remain the same. You may just need to pay in a different place.
Lock-in
Many lenders will offer to guarantee, or freeze, a certain rate for mortgage applicants until their loan closes.
Interest rates change daily, but with a lock-in, if they go up while you are in the process of closing, your rate will not change. If rates go down, you may have the opportunity to take advantage of the better rate by paying a fee.
Mortgage
A type of loan commonly used to buy or refinance a home without having all the cash up-front.
This agreement, between you (the borrower) and a lender, gives the lender the right to take the home if the borrowed money (plus interest) is not repaid. The alternative to a mortgage is paying in cash, but the vast majority of buyers (75%+) get a mortgage, which can be a prudent financial decision even if you have the money available.
Offer
A formal bid to buy a home that includes the purchase price.
The seller may accept, reject, or counter your offer. Once terms are agreed to by both parties, the next step is to sign a purchase agreement. Your agent will help you prepare both!
Origination fee
A fee lenders charge to cover their expenses associated with processing a loan application.
These fees are part of your closing costs, and will be disclosed by your lender. They typically range from 0.5% to 1.0% of the loan value. No worries, Gravy Rewards are here to help cover these costs for you. Check out our renter rewards to learn more.
PITI
Principal, Interest, Taxes, and Insurance.
These are the four elements of your monthly mortgage payment. Some loan servicers will let you pay your taxes and insurance directly, in which case you only pay them the principal and interest each month and you cover your tax bill and insurance bill separately.
PMI (Private Mortgage Insurance)
Insurance to protect the lender in the event a borrower cannot repay their loan.
You are typically required to pay for PMI on loans with a down payment of less than 20%, but over time (once your LTV hits 80%), you will no longer need to carry PMI. PMI can cost between 0.5% and 1.5% of the loan value each year, paid monthly. For example, on a $200K mortgage @ 1.0%, that equals $167 per month.
Point
Money paid upfront to a mortgage lender in exchange for a lower interest rate.
One point, or discount point, costs 1% of the loan (e.g. $1,000 for every $100,000). Typically, the longer you plan to own the home, the more “buying points” or “buying down the rate” will help you save on interest over the life of the loan.
Pre-approval
A conditional agreement made by a lender detailing the maximum mortgage amount they are offering to a borrower.
Lenders will review your income, credit, employment, assets, and debts to determine how much they are willing to lend. Getting pre-approved by a lender is often the first step to take once you are ready to begin actively house hunting, check out our awesome lender partners!
Pre-qualification
An estimate that helps determine if a borrower qualifies for a mortgage, and if they do, approximates the maximum loan available.
A pre-qualification is not a commitment from the lender, and is a less formal version of a pre-approval, which will require additional information.
Pre-qualification can be useful if you are just trying to understand what you can afford, but a pre-approval is a better place to start for serious buyers.
Principal
The size of the mortgage.
This is the total amount you are borrowing, not including interest or any other charges. Your mortgage payment will go toward paying down both the principal balance and covering the interest expense each month.
Property taxes
Taxes paid to the local government where a home is located to fund public schools, emergency services, street maintenance, and other community resources.
Usually paid as part of your monthly mortgage payment into an escrow account and then disbursed by your loan servicer to the appropriate local taxing authority for you. Your property taxes (in addition to your interest payments) may be tax deductible on your annual income taxes. Check with a CPA!
Purchase agreement
A binding contract between the buyer and seller of a house that details the terms of the transaction.
Key terms include the price, financing information, earnest money requirements, proposed timeline, any contingencies, termination conditions, and who is responsible for additional costs.
Once an offer is accepted, your agent will typically draft the purchase agreement to be presented to the seller.
Refinance
Paying off one mortgage with another while using the same property as collateral.
If interest rates have fallen since you got your mortgage, it can make sense to refinance to lower your monthly payment. Homeowners may also elect to refinance so they can use their equity to pay for home improvements or other cash requirements.
Title
A legal right to ownership of a property, including the right to sell it or modify it.
A deed is the actual legal document that would transfer the ownership (title) of a property from one person to another. Prior to closing on your home, a title search will be conducted to confirm the seller owns the property. Even still, title insurance is often required by lenders to protect against any unexpected future claims of ownership.
Underwriting
The process of analyzing an application that a lender goes through to approve or deny a loan.
A mortgage lender will assess your ability and willingness to repay the loan to verify that you meet their financial requirements. They will also review the title search and appraisal prior to making a final determination.
