Your home is probably the most expensive purchase you will ever make as a couple. Because it is, the majority of us require a mortgage loan to help us pay for it. When you get that mortgage loan you sign a promise to repay that loan along with giving the lender something of value if you do not make those payments. In this instance, your collateral is the house. This was a very scary thought for my husband and I. Before we purchased our home, we made sure to sit down and understand what exactly is involved in buying a house. Understanding the terminology and costs involved helped us feel more comfortable about our purchase and allowed us to be excited about our first home together!
I recommend checking out the Capital One Home Loans Online Neighborhood. It is a free online resource where you can learn all about home buying. They have easy-to-understand articles and helpful videos, as well as information about Capital One’s Home Loans offerings.
To help you get started, here are some of the main terms used when buying a home.
Mortgages come in all shapes and sizes, and have pros and cons, but starting with an understanding of what’s available is important. Your mortgage loan payment generally consists of four different parts and is called a PITI payment. Those four items are:
The principal is the part of the mortgage payment that is applied to the original amount borrowed. For example, if the house you are buying costs $100,000 and you are paying 5% down (or $5000), the principal of the loan you are then applying for would be $95,000.
The interest is the amount that the lender charges for lending money. It is the cost of actually getting the loan.
Taxes And Insurance
The taxes and insurance portions are used to pay your property taxes and your homeowners insurance. Having these payments escrowed (or held on your behalf) on a monthly basis prevents you from having to pay a large bill at the end of the year. The lender estimates what these figures are at the beginning of the loan and at the beginning of each year thereafter. These funds are saved in an escrow account and when the bills are due, the lender pays them for you.
My husband and I decided to save and pay these on our own. There was just something about making a smaller payment each month that felt better for us. You will need to decide what is best for you as a couple.
You also need to keep in mind that there are other costs involved in purchasing your new home. These sums are paid before you ever take ownership of the home.
The down payment is your first investment in the house. The minimum amount of the down payment is determined by the lender and is usually 3-5% of the purchase price. If you have more money, you can make a larger down payment and reduce the amount of the principal you will be borrowing and lower the monthly mortgage payment as well.
Closing costs are not always paid at the closing and include some fees you may be asked to pay in advance. These fees include credit report fees or appraisal fees. Closing costs also include money paid to the lender to review the loan, money paid to the city, county or state to transfer taxes. There are also recording fees and fees paid to professionals that provide services to make the sale go smoothly such as attorneys and escrow agents. These fees can range anywhere from 2-7% of the purchase price.
At closing, the lender will usually collect an initial payment of two to three months of taxes and insurance to set up your escrow account. They may also require prepaid costs for interim interest and various types of insurance premiums. That interim interest payment will be for the number of days between your settlement date and the beginning of the following month.
Buying a home is an important process, but certainly not a simple one! All of the terminology and costs involved can get a bit overwhelming. Capital One’s new online resource lays the groundwork with a glossary of terms you should know, an overview of the loans available and more. Sit down with your spouse and go through the Capital One site. Make sure you both understand the process so you can enjoy purchasing your newlywed home!
What scares you most about buying your first home?
I was selected for this opportunity as a member of Clever Girls and the content and opinions expressed here are all my own.