Know These 9 Terms When Shopping For a Home

By: Dawn Shreffler
Loan Officer
HomeStar Bank & Financial Services
NMLS: #1572867
Phone: (815) 937-3888 



Summer is here in Illinois! With it comes colorful flowers, sunshine, baseball and home buying season. If you’re about to be a first time home buyer, familiarize yourself with the following nine terms – you’ll be glad you did!

1. Fixed rate mortgage. This means the interest rate you pay on your home loan won’t change during the life of the loan. Therefore, the principal and interest payments will stay the same during the life of the loan. If you escrow for other property costs such as real estate taxes, hazard insurance and/or flood insurance, your monthly payment may increase or decrease on an annual basis due to fluctuations in annual costs for these expenses, but the principal and interest payments remain the same.

2. Adjustable rate mortgage. Also known as an ARM. This is a type of mortgage where the interest rate varies throughout the life of the loan based on the terms of the adjustable rate program determined at consummation. Normally, the interest rate is fixed for an initial period of time, then the interest rate adjusts periodically based on an index and margin. For example, a 30-year, 5/1 adjustable rate mortgage can have a fixed rate for the first five years then adjust every twelve months thereafter for the remaining term. Adjustable rate mortgages usually have annual caps and lifetime caps that the rate cannot exceed each adjustment and over the life of the loan.

3. Pre-qualification. The process of determining how much money a prospective home buyer may be eligible to borrow before entering into a sales contract.

4. Federal Housing Administration Loan. Also known as a FHA loan. This loan program is excellent for first-time home buyers and features less rigorous lending standards and relaxed credit score requirements.

5. Appraisal. A written analysis of the estimated current market value of a property performed and prepared by a certified licensed appraiser.

6. Private Mortgage Insurance (PMI). Private mortgage insurance is insurance that protects lenders against loss if a borrower defaults on a mortgage. Generally, PMI is required for mortgages with less than 20% down payment or equity.

7. Closing Costs. Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Some examples of closing costs normally paid by a borrower in connection with a loan include origination fees, application fee, appraisal fee, recording fees and charges for obtaining title services. Closing costs percentage will vary according to the area of the country; lenders can provide estimates of closing costs to prospective homebuyers. In addition to closing costs, there may be prepaid items due at closing which can include real estate taxes, hazard insurance, private mortgage insurance and special assessments.

8. Points. Points are pre-paid interest. The more points you pay, the lower your interest rate will be. One point is a charge equal to 1% of the loan amount. So if you’re buying a $200,000 house, and a lender is charging you 2 points, that’s $4,000.

9. Escrow. This term can mean different things in relation to real estate transactions. It can mean the amount of money held in an escrow fund for the payment of items such as real estate taxes and/or hazard insurance. Secondly, escrow can refer to the earnest money or deposit that is being held by a third party to be delivered upon the fulfillment of a sales contract. When you look at a house, love it, make an offer and put down a deposit, that deposit would be put in an escrow account where your money is kept safe. Finally, the term escrow can also mean the settlement or completion of the purchase transaction. Different markets use different terms so be sure to discuss with your lender or real estate professional.

If you’re thinking about a new house, we can help! The loan professionals at HomeStar Bank & Financial Services will guide you through the home buying process. Whether you’re a first-time home buyer or a seasoned investor, we offer a variety of loan options and benefits. For more information please visit HomeStar online, or you can contact me directly at: (815) 937-3888 or email me at


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