Buying your first home can feel overwhelming, especially when mortgage terms start showing up on loan estimates, disclosures, and purchase paperwork.
If you’re a first-time buyer in Washington and are obtaining a mortgage loan, understanding a few key terms can help you compare costs, make better borrowing decisions, and move through the home buying process with more confidence.
In this post, we will go over 7 mortgage terms that every Washingtonian should know before they embark on buying their first home. There are plenty of other important mortgage terms to know about, but these are a few terms that will show up with the greatest frequency.
This term actually has two meanings, one meaning in accounting and one meaning in lending. In lending, the term “amortization” refers to a payment schedule which has a fixed time period and involves the paying off of both principal and interest, although these two things are paid in varying amounts.
For instance, when a mortgage loan is amortized, more of the monthly payment will go toward interest in the early part of the schedule, and that’s because the loan balance is larger. The larger loan balance generates a larger interest payment, but this changes over time as the principal is gradually paid off.
The term “annual percentage rate” is a term you’ll very likely see during the home buying process in Seattle, Kirkland, or any other city in Washington State. In simple terms, the annual percentage rate is the “true” interest rate you’ll pay over the course of your loan repayment.
When you obtain your mortgage loan, you’ll have a certain interest rate, but then you’ll also pay various fees (such as the “origination fee”) which can drive up your monthly payment. Your APR is the interest rate that you are effectively paying on a monthly basis to generate your monthly payment. This means that your APR will be a bit higher than your nominal interest rate.
Closing costs are the fees a buyer pays in order to close the mortgage deal on a home. Closing costs are also referred to as “settlement costs” because they appear in an itemized fashion on the settlement statement of the transaction.
Closing costs can vary depending on the specifics of the transaction, but they include things like title insurance, agent commissions, escrow fees, transfer taxes, recording fees, and other things as well. In competitive markets such as Seattle or Bellevue, closing costs are definitely something buyers need to be aware of. Closing costs can quickly add up and so you need to be conscious of the final amount of these costs.
Earnest money is money delivered to the seller of the home by the buyer as a show of good faith that the buyer is serious about purchasing the home. Earnest money can vary as a percentage of the purchase price. Usually, the earnest money is between 3% to 5% of the purchase price.
Earnest money is sent to an escrow account and held until financing is arranged. Once financing is arranged, the money is credited to the price. In most cases, if financing falls through, the seller actually gets to keep the money. This is an important thing for first time home buyers in Washington State to know.
Your principal is the amount of your loan balance which represents your equity in your home. When you pay principal, in other words, you build equity in your home.
The principal determines the amount you will pay on a monthly basis as it determines how much you will pay in interest. If you have an interest rate of 4%, 5%, or any other rate, that interest rate will be used together with your principal to calculate your monthly payment.
Private mortgage insurance is a type of specialized insurance that protects the mortgage lender in the case of default. As a general rule, private mortgage insurance (or PMI) will be required whenever you obtain a mortgage loan with less than 20% down.
With PMI, you will pay a monthly premium which usually amounts to a small percentage of the overall size of the loan. At least this is the case for conventional, non-government backed mortgages.
For government-backed mortgages, mortgage insurance is handled a bit differently. Depending on whether the loan is either an FHA loan, USDA loan, or VA loan, the borrower may be required to pay an upfront fee and either a monthly premium or annual premium.
Title insurance provides protection against claims relating to the status of your ownership of a certain property. There are two forms of title insurance: lender’s title insurance and owner’s title insurance. Each of these types of title insurance provides protection for its holder.
In most cases, when you have a mortgage, the mortgage lender will require you to procure the lender’s title insurance. Costs for title insurance vary and so you should check out the rates offered by different companies before making a decision.
Related: Is Title Insurance Required in WA State?
If you’re a first time home buyer in Washington State, knowing these terms will certainly come in handy. This is especially true if you’re planning to buy in one of Washington’s more competitive, complex real estate markets, such as Seattle, Bellevue or Kirkland.
Buying your first home won’t be a simple task, in any case, but if you equip yourself with some basic mortgage terms, you will go a long way toward simplifying the entire process.
Another way you can help yourself is by getting in touch with a mortgage professional. The mortgage professionals at Sammamish Mortgage can assist in demystifying the process and explaining essential concepts.
Do you have questions about applying for a mortgage in Washington? If so, we can help. Sammamish Mortgage is a family-owned mortgage company that has been serving borrowers across Washington, Colorado, Idaho, Oregon, and California since 1992. We provide quality mortgage loan programs to customers in the Pacific Northwest, including our 15-year and 30-year fixed-rate mortgages, adjustable-rate mortgages, and jumbo loans. Visit our website to get an instant rate quote or to use our online mortgage calculator. Contact us to learn more or to get pre-approved for a mortgage!
Key terms include amortization, annual percentage rate (APR), closing costs, earnest money, principal, private mortgage insurance (PMI), and title insurance. Understanding these terms can make it easier to compare loan costs and follow the home buying process with more confidence.
Amortization is the loan payment schedule over a fixed period of time. Mortgage payments usually include both principal and interest, but the amounts change over time. Early in the loan, more of the payment typically goes toward interest because the balance is larger.
The interest rate is the rate charged on the loan itself, while APR reflects the broader cost of borrowing by including certain loan fees in addition to the interest rate. Because of those added costs, APR is usually a little higher than the nominal interest rate.
Yes. Closing costs are the fees paid to complete the mortgage transaction, while the down payment is the portion of the home’s purchase price paid upfront by the buyer. Closing costs can include items such as title insurance, escrow fees, transfer taxes, recording fees, and other transaction-related charges.
Closing costs are the fees paid to close the mortgage deal on a home. They are also called settlement costs because they appear as itemized charges on the settlement statement. These costs can vary by transaction and may include title insurance, agent commissions, escrow fees, transfer taxes, recording fees, and other charges.
Earnest money is a deposit the buyer provides as a good-faith sign that they are serious about purchasing the home. It is typically placed in an escrow account and is generally credited toward the purchase once financing is arranged.
It may not be. In the situations described here, if financing falls through, the seller may get to keep the earnest money. Buyers should understand how the earnest money terms work before submitting an offer.
Principal is the amount of the loan balance. When principal is paid down, the borrower builds equity in the home. The principal also affects how much interest is charged because interest is calculated based on the loan balance.
For conventional mortgages, PMI is generally required when the down payment is less than 20%. PMI protects the lender in case of default and is usually paid as a monthly premium. Government-backed loans can handle mortgage insurance differently, sometimes with upfront fees and either monthly or annual premiums.
Title insurance protects against claims related to the ownership status of a property. Lender’s title insurance protects the mortgage lender, and it is commonly required when there is a mortgage. Owner’s title insurance protects the homebuyer as the property owner.
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