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Top 5 terms every homeowner should know

Date posted:  3/10/16 09:00:00 AM

When you decide to become a homeowner, there are a few terms you will need to be aware of before you sign on the dotted line. Because it is a new experience, taking a little time to research important concepts is part of the homebuying process. Here are five need-to-know phrases you should become more familiar with during your home purchase journey:

Fixed-rate mortgage

When you apply for a home loan, a fixed-rate mortgage (FRM) is one of the options available to you. With this type of home loan, the interest rate you pay will not change. This fixed monthly payment makes budgeting easier because you know it will not fluctuate unexpectedly with the market.

U.S. News & World Report noted that even if your property taxes rise or homeowners insurance increases over the years, your monthly mortgage payment will not change too drastically with an FRM.

Adjustable-rate mortgage

Another option for home buyers is an adjustable-rate mortgage (ARM.) When you first apply for an ARM, the interest rate may be slightly lower than the rate quote you receive for an FRM, but you only have that rate for a certain amount of time. This may be an ideal option for someone who does not plan to stay in a home for more than five or 10 years.

Private mortgage insurance

While you have likely heard a 20 percent down payment for a home is ideal, there are some options available that will allow a down payment as low as 3 percent. However, because a lower down payment is classified as a riskier loan, you will need to pay private mortgage insurance until you reach 20 percent equity in the home.

Typically the private mortgage insurance (PMI) fee lands somewhere between 0.03 percent and 1.15 percent of the original loan. This number is then divided between 12 monthly payments made over the course of the first year of homeownership. If you want to avoid paying PMI, consider a more affordable home or wait to purchase until you have saved 20 percent for a down payment.


Equity represents how much you have put toward the value of your home. The more equity you build, the less you owe the lender. After a few years of gaining equity in your home, you may have the opportunity to use that equity as collateral to access a credit line or loan from a lender. These products are called home equity lines of credit or home equity loans, and they can be used to pay off other debts, make improvements to the home or even help your child pay for college.

Assessed value

When you purchase a home, you will also need to sign up for homeowners insurance. According to HouseLogic, the local tax assessor will determine how much your home is worth and this number will be used when you decide on an appropriate insurance policy.

In addition, the assessed value is used to figure out how much you must pay in property taxes. This value can be disputed if you believe it is inaccurate for any reason.

A home is a substantial financial commitment, so becoming more familiar with terms used during the homebuying process can help you navigate the various circumstances involved with homeownership.