Buying your first home is an exciting journey, but it can also be filled with unfamiliar terminology. To help you navigate the process with confidence, Allen Edwin Homes—Michigan's top new home builder—shares 10 common terms every first-time home buyer should know:

1. Mortgage

A mortgage is a loan used to purchase a home. It’s secured by the property, meaning the lender can take ownership of the home if the borrower fails to make payments. Mortgages typically have a repayment period of 15 to 30 years and come with a fixed or variable interest rate.

2. Down Payment

The down payment is the initial amount of money a buyer pays upfront when purchasing a home. It’s typically expressed as a percentage of the home’s purchase price. While the standard down payment is 20%, many first-time buyers may qualify for loans with lower down payment options, sometimes as low as 3-5%.

3. Interest Rate

The interest rate is the cost of borrowing money from a lender, expressed as a percentage of the loan amount. It’s one of the most important factors to consider when choosing a mortgage, as it directly affects your monthly payments and the total cost of the loan over time.

4. Private Mortgage Insurance (PMI)

PMI is a type of insurance that lenders require when a buyer makes a down payment of less than 20% of the home’s purchase price. PMI protects the lender in case the borrower defaults on the loan. It adds to the monthly mortgage payment and can often be canceled once the homeowner reaches 20% equity in the home.

5. Closing Costs

Closing costs are the fees and expenses associated with finalizing a home purchase. They typically range from 2% to 5% of the home’s purchase price and can include appraisal fees, title insurance, attorney fees, and more. Both the buyer and seller may be responsible for certain closing costs.

6. Earnest Money

Earnest money is a deposit made by the buyer to show they are serious about purchasing the home. It’s typically 1% to 3% of the purchase price and is held in escrow until closing. If the deal goes through, the earnest money is applied to the down payment or closing costs. If the buyer backs out of the deal without a valid reason, they may forfeit the earnest money.

7. Escrow

Escrow refers to a neutral third party that holds funds or documents on behalf of the buyer and seller until certain conditions are met during the home buying process. For example, the earnest money is held in escrow until the sale is completed. After closing, escrow may also be used to manage payments for property taxes and homeowners insurance.

8. Fixed-Rate vs. Adjustable-Rate Mortgage (ARM)

A fixed-rate mortgage has an interest rate that remains constant throughout the life of the loan, providing predictable monthly payments. In contrast, an adjustable-rate mortgage (ARM) has an interest rate that can change periodically, typically after an initial fixed period. ARMs may start with lower interest rates, but the payments can increase over time, making them riskier for some buyers.

9. Appraisal

An appraisal is a professional assessment of a property’s value conducted by a licensed appraiser. Lenders require an appraisal to ensure the home is worth the amount they are lending. The appraisal protects the lender from lending more money than the home is worth, and it can also help the buyer avoid overpaying.

10. Homeowners Association (HOA)

A homeowners association (HOA) is an organization that manages a community of homes, such as a condominium complex or a neighborhood with shared amenities. HOAs charge monthly or annual fees to cover the cost of maintaining common areas and enforcing community rules. When buying a home in an HOA-governed community, it’s important to review the rules, fees, and restrictions to ensure they align with your lifestyle.

Understanding these key terms will help you feel more confident and informed as you navigate the home buying process. With this knowledge, you’ll be better equipped to make decisions that align with your financial goals and homeownership dreams. Remember, buying a home is a significant investment, and being well-prepared is the first step toward making that investment a success. Questions about buying your first new construction home in Michigan or Indiana? Contact Allen Edwin Homes today, Michigan's leading new home builder of affordable new construction for first-time home buyers.