8 Terms New Homebuyers Need to Know

Are you thinking about buying a home? We’re here to help! To begin, here are 8 terms that are essential to know.

Closing Costs/Pre-paid

You may hear these terms together (or interchangeably) in reference to the expenses you’ll pay at the time you close on your home. Pre-paids are payments that your lender will require you to provide upfront. These typically include 2–6 months of homeowner’s insurance and 2–6 months of property taxes. Closing costs are fees you pay to your lender and third parties for administering the mortgage and real estate transaction. Examples include appraisal fees, attorney fees, local government recording charges, and title insurance. All told, you can expect these upfront costs to run 2–5% of the home price. 


These are specified conditions that have to be met before the sale of a home can be completed. Generally, the fewer contingencies you require of a seller, the stronger your negotiating position. However, contingencies can also protect you as a buyer. An appraisal contingency ensures that the home is impartially valued at a certain minimum amount. A financing (or mortgage) contingency gives the buyer time to secure a loan. An inspection (or due diligence) contingency gives you the right to have the home professionally examined for condition issues and negotiate the purchase price or upfront repairs based on any findings. 


This is an arrangement where money is held by a third party until a particular condition is met. Escrow can be confusing to new homebuyers because it’s used for two different purposes. The first is to protect an earnest money (or good faith) deposit – a check for 1–3% of the purchase price that you may provide before closing to show the seller you’re serious. (Earnest money is refundable under certain circumstances, but you’ll forfeit it if you simply have a change of heart.) The second purpose of escrow is to hold prepaids (see above) that you’ll make before closing. 

  • Monthly Escrow Payments: If your lender required taxes and insurance be included in your monthly mortgage payment, then each month the escrow portion of your mortgage payment will be deposited into the “escrow account”. Your lender will pay the insurance premiums and real estate taxes when they are due. Your lender may require an “escrow cushion,” as allowed by state law, to cover unanticipated costs, such as a tax increase. 

Origination Fee

This is a fee that a lender may charge to cover processing expenses related to providing your home loan. It can be a percentage of the amount loaned, i.e. 1% or a flat fee.  This fee can be paid upfront as a closing cost (see above) or factored into the loan amount and APR (see below). Some lenders may advertise that they have no origination fees, in which case interest rates are likely set higher to compensate. Beware of any entity that demands a fee before a loan is granted – trustworthy lenders will accept payment after you’re approved. 


This stands for Principal, Interest, Taxes and Insurance (PITI). Together, these make up your monthly mortgage payment. When you’re being considered for a home loan, a lender will estimate your PITI and compare it to your income to make sure you can afford the monthly payments. As a rule of thumb, homebuyers should spend no more than 28% of their gross monthly income on PITI and no more than 36% on total debt (PITI plus other debt like car loans and student loans). Note that PITI doesn’t cover all the costs of homeownership – you have to consider maintenance and utilities, too. 


This stands for Private Mortgage Insurance, which is required if you put down less than 20% as a down payment on your home. The cost of PMI can vary depending on your location, credit score, debt-to-income ratio, and the size of your down payment. A typical payment is 0.3–1.5% of the loan amount per year until you reach 20% equity. Some first-time homebuyers will opt to save up for a 20% down payment to avoid paying PMI, but you may prefer to buy sooner and keep more cash free to cover unexpected repairs or other life expenses. 


These are two very similar terms that are often confused with each other. A Pre-Approval is a lender’s conditional agreement to lend you a specific amount of money. It’s issued after meeting with a lender and reviewing various financial documents like pay stubs, W-2 forms, and bank statements. A Pre-Qualification is an earlier step in the homebuying journey. It’s a helpful estimate of what you might be able to afford based on a credit check and a quicker assessment of your income and assets. Our easy online mortgage prequalification can help you determine if now is the right time to buy. 


This is your cost of borrowing money. Mortgages are often discussed in terms of Annual Percentage Rate (APR), which includes all fees and represents the actual yearly cost of the mortgage. A fixed-rate mortgage has the same interest rate throughout the entire term. This way, your monthly budgeting is a snap, and you won’t have to pay more if rates go up in the future. ARMs (adjustable-rate mortgages) start at a lower fixed rate for a set period and then vary based on the market. This can be a cost-effective option for homebuyers who expect to move or refinance soon.