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Summary: First time home buyers in Washington State can benefit from knowing the definitions of key mortgage terms. This article provides definitions for several key pieces of mortgage terminology.
The process of buying a home can be a bit overwhelming for first time home buyers. If you’re a first time buyer in Washington and are obtaining a mortgage loan, you will have to gather documents, go through the application process, and consult with various real estate professionals, among other things. And then there’s the inspection process, closing process, renovations and so on.
As if these things weren’t enough, you may also be inundated with all kinds of concepts and terminology which may very likely be unfamiliar to them. Like any other industry, the mortgage industry has its own lingo. First time home buyers should take some take time to familiarize themselves with a few key pieces of this lingo so that they can better navigate the home buying process. The last thing you want is to be mystified by mysterious terminology throughout your home buying journey.
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.
We will cover the following terms:
- Annual Percentage Rate
- Closing Costs
- Earnest Money
- Private Mortgage Insurance
- Title Insurance
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.
#2. Annual Percentage Rate
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.
#3. Closing Costs
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.
#4. Earnest Money Deposit
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.
#6. Private Mortgage Insurance
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, USDA or VA loan, the borrower may be required to pay an upfront fee and either a monthly premium or annual premium.
#7. Title Insurance
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.
Contact Sammamish Mortgage for Additional Information
Do you have questions about applying for a mortgage? If so, we can help. Sammamish Mortgage is a family-owned mortgage company that has been around since 1992. We provide quality mortgage loan programs to customers in the Pacific Northwest, including WA, OR, ID and CO. Contact us to learn more!