When I was in Vegas last week, my friends and I were talking about how my friend is buying her first house. I talked about her a little bit in this post. As she was talking about their home buying process, I was the only one out of the 6 of us who knew really what she was talking about.
They finally found a house that they really love, but they have no clue what a lot of words mean. Amortization? Equity? Earnest money?
She said that they've been asking their loan officer and realtor what everything meant, and understand it now, but didn't in the beginning. And my other friends had no idea.
They kept joking about how they had no clue what anything meant. I think these are terms that the average person should know, especially since a lot of my friends are thinking about buying a house and yet they don't understand what these terms mean. So I thought I would make a VERY (joking of course) interesting post so that you can know before you start!
This is where a person pays both the principal and interest. More interest is paid in the earlier payments than at the end of the loan.
This is where/when the house is closed and finished. Lots of papers are signed, along with many checks transferred. The ownership of the property is transferred at this time and keys are given.
My friend said she had equity on her house. All of my friends had no clue what this meant (yes I am sad by this). The house has positive equity if the amount owed is less than the value of the house. The value of a homeowner's unencumbered interest in real estate. As you pay off your house, the equity increases.
I can't remember the exact amount that we paid as earnest money, but I do believe that it was around $1,000. This was a deposit by us to show the sellers that we were serious about buying the house. This money is put towards the down payment. However, if the buyer backs out of the deal (due to a fault of their own), then they do not get the money refunded.
Many lenders set up an escrow account that receives monthly payments from home buyers to pay for ordinary expenses such as: insurance, taxes and assessments.
Private Mortgage Insurance.
PMI for short. Sadly, we didn't put a large enough down payment on our house in order to eliminate PMI. PMI is required when less than 20% of the home sale price is paid. PMI protects the mortgage lender against default. We hope to pay off our loan faster in order to eliminate this.
Title insurance protects against loss from disputes over ownership of the house.
There are also many other areas to keep in mind also:
- Your monthly payment does NOT include everything. Yes my friend actually thought all utilities (electric, water, heat, phone, etc.) are all included. For me, my payment only includes the actual mortgage, property taxes and home insurance. Some payments also include waste as well though.
- GET AN APPRAISAL. I can't stress this enough. My friend told my other friend that she should skip this and just walk around the house herself (I love my friends, but I never said they were the brightest on earth).
- Get pre-approved. Wouldn't it really suck if you found the house that you love and then realize that you can't get approved for that amount?
- Look into all grants, credits, etc. that you can get. My friend and her significant other were able to qualify for a grant that will allow them to not pay any interest on their mortgage for the first 5 years. I'm not sure how this will work out, but I'm sure there are other things like this out there.
- Also if you live in a historic house or historic city, then most of the time the city will pay to improve your house. My friend just got an interest free loan (that he doesn't have to pay back unless he moves out within 10 or something years) of $12,000.
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