Important lesson: Never buy a house without doing your homework.
Do you remember the 1980’s movie The Money Pit? Well you won’t have to deal with all that mess when you purchase a newly built home, but there are things you do need to understand before you finance the perfect home for you. Buying your first home can be scary, but it doesn’t have to be.
If you are a first-time home buyer, or it’s been a while since you have been through the process, there are several common terms you should know as you navigate the ins and outs of buying a new home. Here are the basics:
APR (Annual Percentage Rate) is a numeric representation of your interest rate that you, the borrower, will pay on the loan. The APR on a mortgage MUST include any fees you pay upfront, including original loan fees. Your average compound interest and fees over the term of the loan are expressed as a percentage that you can use to compare offers from different lenders.
Appraisal – Obtaining a home appraisal is a critical step of home buying. Mortgage lenders almost always require a property appraisal before approving a home loan. It is essentially an unbiased estimate of the true (or fair market) value of what a home is worth. The location of the home also plays a big role in valuation.
ARM – An Adjustable Rate Mortgage is one with an interest rate that changes as the market conditions change. Once the initial fixed-period is completed, a lender will apply a new rate based on the index, the new benchmark interest rate, plus a set margin amount to calculate the new rate. An ARM is often attractive to young, mobile and career-driven borrowers, mostly for its lower initial payments and flexible term features. However, ARMS are generally considered riskier because your interest rate will probably go up after the initial fixed-rate period ends. Like any other loan, the initial agreement spells out the terms, so you should have a clear understanding of all the details before you make a decision.
Closing – Congratulations! This is the final step in buying a home! This is the FORMAL and FINAL transfer of a home’s ownership between parties.
Closing Costs – You will already know from your disclosure form exactly how much you’ll have to cough up for a down payment and closing costs. Some of the expenses included in the closing costs include, appraisal fees, credit check fees, escrow fees (see below), points (see below)
Contingency – If certain terms aren’t met, a contingency item in the contract allows you to get out of completing the purchase. One of the most common contingencies — and one that you should make sure is included in your contract — is the ability to void the contract if the home you plan to buy doesn’t pass its home inspection.
Conventional Mortgage – Any mortgage which is not insured or guaranteed by a government agency such as HUD/FHA, VA, or the Farmers Home Administration. A conventional mortgage is a loan that is not guaranteed or insured by any government agency. It is typically fixed in its terms and rate. Conventional mortgages can have better interest rates than non-conventional mortgages and can be a great option for those with the 20 percent down payment.
Earnest Money – Earnest money is a basically a security deposit as you enter into the agreement to buy a property. The remainder of the money is owed at closing. This deposit will be held in an escrow account, a type of trust fund controlled by both the seller and the buyer – until you successfully complete the closing. If you fail to complete the purchase, the seller keeps the earnest money.
Escrow – An escrow is a financial arrangement where a third party holds onto something of value during a transaction. If you’re purchasing new construction, you may have funds held in escrow until all work is complete and you’ve signed off on it. It helps make transactions more secure by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the escrow company.
Equity – This is the amount of ownership you have in your home. Equity is the difference between the market value of your home and the amount u owe to the lender on the mortgage.
Fixed-Rate Mortgage – Where your interest rate stays the same throughout the term of the loan. No matter what happens to the markets, the interest rate remains the same.
FHA – An FHA loan is a mortgage insured by the Federal Housing Administration. These loans can be especially popular among first time home buyers because they allow you to put down payments of 3.5% for credit scores of 580+. The downside to an FHA is that borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.
PMI – Private Mortgage Insurance is required if you do not have a down payment of at least 20%. PMI is designed to protect the lender, if the borrower defaults – and the lender is reimbursed by the insurance.
Title – This is indication of the complete ownership of the home – usually recorded at the deed.
At Front Light Building Company, we are not only experts in building top quality new homes, but we can help you navigate the financial aspects of your home purchase. Whether you are building a new house, or purchasing a home in a new neighborhood, our experts can advise you every step of the way as you secure the right mortgage for you and can help seamlessly guide you through the entire appraisal, mortgage and closing processes. Call us today at (843) 380-4800 to learn more about Front Light Building company and our unique homes and homebuilding process – and let us guide you as you find the home, and lifestyle, you’ve always wanted.
Matt Green (Partner, Front Light Building Co.) has over 15 years experience in the construction and development business. He is the owner of JCM Ventures, LLC and most recently was responsible for the development of Buckwalter Place town center in Bluffton, SC. He is co-founder of Live Oak Group, LLC and Live Oak Property Group, LLC, real estate development firms focusing on residential and commercial projects.