Home buying terms you need to know

Buying a home brings you into a whole new world of lingo that you've probably never heard before. These are some of the most important terms you need to familiarize yourself with before you set out to find your new home.

Adjustable-rate morrtgage (ARM): This is a mortgage with an interest rate that can fluctuate over time. The floor is the minimum interest rate the loan has. The ceiling is the highest rate the interest can reach.

Agent: This is the person who shows you real estate.

Amortization: This shows how the loan is paid off over time and what percent of interest and principal are paid.

Annual percentage rate (APR): This is a description of the way your mortgage interest is paid out over a year.

Closing: The closing is the transaction during which all the documents are signed, you borrow the money, pay the seller, and in return, ownership is transferred to you.

Closing costs: In addition to the price of your home, you are responsible for closing costs, a variety of services and fees that are involved in processing the mortgage and transfer of title. Closing costs can total several thousand dollars and may include things like:

• Appraisal: a valuation of the property you are buying
• Attorney fees: you will pay your attorney's costs for the closing and, in some situations, you may have agreed to pay the seller's as well
• Credit check: a check of your financial health
• Mortgage origination fee: a fee you pay the bank to handle your mortgage
• Notary fees: a notary ensures that you are who you say you are when you sign a document and sometimes must be paid for this
• Title insurance: a specific type of insurance that will insure the bank giving you your mortgage in case there is some future problem with the title
• Title search: a search of county records to be sure the title is clear and can be passed to you

Closing statement: This is a complete accounting of all of the costs and fees associated with the mortgage and home purchase. It will list all of the closing costs.

Contract of sale: The document you sign when you agree to buy a home.

Deed: Title is usually transferred with a deed, which is a legal document changing ownership.

Down payment: You are required to make a down payment on your home (a certain percentage of the cash up front) and finance the rest of the purchase with a mortgage.

Earnest money: A deposit of about one to five percent of the purchase price. It shows you are serious about the purchase. The money is used towards the total purchase price of the home. If the sale does not go through (if it fails a home inspection or title search, for example), you will get the funds back.

Escrow: When you put up earnest money, it will be held in escrow. When money is held in escrow, a third party, often a title company or an attorney, holds the money until the sale goes through. This protects both you and the seller.

Fixed interest rate mortgage: This is a mortgage with an interest rate that remains the same for the life of the loan.

Home inspection: This is an inspection by an expert chosen by the buyer to make sure the home is in good condition. Passing a home inspection can be a requirement of your contract.

Homeowner's warranty: This is a guarantee by the seller about the condition of the home. If later problems are found with the home, the seller will be required to pay for them. This is not included in every contract and is considered an incentive.

Interest: This is money you will pay the bank for the privilege of using their money.

Lien: A lien is a hold on a property placed by someone to whom the owner owes money, often a contractor. If there is a lien on a property, the lienholder must be paid if the title is to pass.

Loan to value ratio: This is the amount borrowed compared to the appraised value of the property.

Lock-in period: The time a buyer has to agree to an interest rate and be locked in at that rate.

Mortgage: A mortgage is a loan from a financial institution that lets you borrow the funds you need to buy a home.

Mortgage broker: This is a person who can compare available mortgages for you and help you find the best deal.

Mortgage escrow: Your mortgage will likely have an escrow. You can let the bank pay your property tax and homeowner's insurance for you, but in exchange, the total amount owed will be divided by 12 and added to your monthly mortgage payments. Those fees will be held by your bank in escrow, in a separate account, and paid when the bills are due. Your bank may require this, or it may be optional. When you use escrow for this, you don't have to worry about coming up with large amounts of money to pay your property taxes or homeowner's insurance each year. However, the funds won't earn any interest for you in escrow, unlike if you kept the money in your own savings account.

Mortgage points: This is a fee you pay to your lender upfront to get a lower interest rate on the loan. Each point is equal to one percent of your mortgage amount. Buying points allows you to pay less in the long run because your interest rate will be lower, but you must have the cash upfront to buy the points.

Note: The note is the loan document that is your promise to pay the bank.

Pre-approval: This is a promise by the lender that they will offer you a mortgage of a certain amount. Some sellers will not consider an offer without one since it eliminates offers that would not qualify for mortgages.

Pre-payment penalty: Some mortgages charge you a fee if you want to pay the mortgage off before it is scheduled to end.

Principal: This is the amount you are borrowing from the bank for your mortgage.

Private mortgage insurance (PMI): This is additional insurance the buyer must pay for which insures the mortgage lender if the buyer does not pay back the mortgage.

Title: Title shows ownership in a home. When you take title to the property, there are a variety of ways title can vest:

• Sole ownership: You are the only owner.
• Tenants in common: You own the property with someone else and you may not each have equal ownership shares.
• Joint tenancy: You and someone else own the property equally.
• Joint tenancy with right of survivorship: You own the property with someone else and if one of you dies, the other person assumes full ownership without any further legal proceedings.

Title insurance: You will likely need to purchase title insurance, which is a specific type of insurance that will insure the bank giving you your mortgage in case there is some future problem with the title.

Title search: As part of the closing process on the home, your attorney will do a title search, which checks the county records to see who owns the home and to be sure there aren't any liens against the property.

Underwriting: The process a mortgage application goes through as the lender determines the amount of risk it creates for them.

Vest: This is a legal term for when someone holds title in a property—title vests in them.

Buying a home is an exciting step. Understanding the terms used can help you feel confident as you make an offer and become a homeowner.