7 Terms to Know Before You Buy

October 22, 2015

Understanding what a mortgage is and how it works is certainly a big part of the home-buying process, but it’s not the only part. Appraisals, bidding, and negotiations are just some of the other steps toward buying or selling a home.
There are many terms associated with the entire process of buying a house, and not all of them are as clear as they may seem on the surface. Here are seven terms you simply must know signing your name on the dotted line.

1. Appreciation

Appreciation is the increase in a home’s value over time. This increase is caused by external factors—such as gains in the economy or property value—rather than by improvements or additions the homeowner makes to the house.

2. Closing Costs

Closing costs are the final charges that are paid at the end of the bargaining process when the house is being transferred from one owner to the other. These costs might include property or transfer taxes, prepaid interest, lender’s fees, fees from credit checks, deed filing, appraisal, inspection, or attorneys, insurance premiums, homeowner’s association fees, and the real estate agent’s commission.

3. Depreciation

The opposite of appreciation, depreciation is the loss in value to a home over time as a result of economic factors. Depreciation can also be attributed to age, wear and tear, and deterioration of the building itself.

4. Escrow

Escrow is the period right before the home closes, or right before the deal is finalized. During escrow, a neutral third party is designated to hold onto the home’s documents (such as the title, purchase contract, etc.) and the money needed to pay taxes, insurance, and other costs that occur during the escrow period.

5. Equity

Equity is the value a home has beyond the amount it costs. In other words, if you subtract the owner’s debt from the house’s fair market value, you find out how much equity the owner has in the home.


PITI stands for principal, interest, taxes, and insurance—the four main expenses in a mortgage payment. The principal is the amount borrowed to pay for the home; interest is the amount of interest that will accrue over the mortgage term; taxes are the property taxes covered under the mortgage terms; insurance is the homeowner’s insurance that is required for the mortgage period.

7. Underwriting

Underwriting is the process during which a bank or lender decides whether or how to grant a loan to a person who is interested in buying a home. Specifically, the lender has to figure out whether or not it would be too risky to give the potential buyer the money he or she is requesting to fund the home sale.
Of course, there are plenty of other confusing or specific terms that pop up as you go about trying to purchase a new home. Always feel free to ask your agent to clarify or explain anything you don’t understand—it’s in your best interest to know what you are actually agreeing to!


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