Roughly a third of Americans plan on buying a home within the next 5 years. If you’re among the bunch, then you may’ve already come across a few, ahem, inscrutable terms that make your head spin. Hey, we get it. That’s why we’re going to help demystify common but confusing home buying jargon. That way, getting into your new digs can be … well … surprisingly painless. 

Adjustable Rate Mortgage (ARM)
An ARM is a mortgage whose interest rate changes over time. That means your interest rate — and monthly payments — may go up or down depending on changing market conditions. Many ARM’s will have a fixed period. The most popular being the 5/1 ARM. All that means means is you get an introductory rate that stays the same for 5 years. After that it can change every year until the end of the loan period. Most ARMs have a “cap,” which limits how much the interest and loan payment can change every year and over the life of the loan.

Amortization
This is just a fancy word for fixed payment schedule. It outlines how you’ll pay off a debt, like your mortgage, over the course of specific time period.

Annual Percentage Rate (APR)
An APR is the annual interest rate charged by a lender for borrowing money from them. In the case of a mortgage loan, this number usually includes upfront fees and charges.

Closing Costs
These are costs that the buyer and seller must pay to complete the sale. Things like appraisal costs, credit reports, document prep fees, etc. Closing costs typically come out to around 2-7% of the property’s sale price, but the exact number depends on the specific terms of the sale.

Escrow
When two parties are about to complete the sale of a house, a third party’ll hold onto the funds until all conditions of the sale are met. This is called an escrow account (or sometimes an impound account). Usually these conditions include a home inspection. Once those conditions are met, the money can be transferred to the seller.

Fixed Rate Mortgage
In a fixed rate mortgage, the interest rate stays the same for the entire life of the loan. It’s important to note that your actual mortgage payments can change depending on if your homeowners insurance rates or property taxes go up or down. Fixed rate mortgages typically come in terms of 30 or 15 years.

Origination Fee/Points
An origination fee is the amount of money a lender charges to process a loan application or create a new loan. The amount is usually a small percentage of the total mortgage loan price. 

Private Mortgage Insurance (PMI)
If a borrower has less than 20% for a down payment on a property, then they’ll likely have to pay their mortgage lender something called PMI. This is basically insurance for the actual mortgage payments. It assures the buyer’s skin’s in the game and protects the lender if they default on their loan. PMI usually costs a percentage of the entire annual mortgage amount.

And if you’re thinking of making an offer, make sure you have homeowners insurance lined up. Your lender’ll more than likely require it before closing and for good reason. 

A standard policy covers your homeother structures on your propertyyour belongings at or away from home. It even covers your liability and helps pay for temporary housing if your home’s ever unlivable after a covered event. Start a quote with Esurance today, enjoy your new digs sooner.

Insurance 101 | Homeowners 101

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about Rebecca

Rebecca is a freelance copywriter and editor living in the SF Bay Area with her husband and two kids. She enjoys productively channeling her anxiety into safety-minded articles for home and garden, running with her robot trainer, and advocating on behalf of the Oxford comma.