“Could You Amortize My Escrow?”
A Translation Guide for the First-Time Homeowner
How are you supposed to make informed decisions if you can’t make sense of the information being presented to you? It’s a tall task to get up to speed with all of the potential phrases your real estate agent or mortgage lender might casually drop in conversation, so we’ve compiled a handy guide to bolster your home-buying vocabulary. Here’s your first lesson: That title is complete gibberish, for reasons you’ll soon learn if you aren’t already privy to the ambiguous terminology that surrounds home sales.
This refers to a gradual repayment of a loan over a fixed amount of time. Your mortgage, for example, is a loan amortization. (It’s not a coincidence that it shares a base with “mortgage.”) Fun fact: According to the logophiles at Merriam Webster, the word derives from Vulgar Latin’s “admortire,” which means “to kill.” So, when you amortize a loan, you’re “killing it off.” That should make writing those monthly checks a little more exciting, right?
Although it sounds more like a character from a tabletop role-playing game than a financial label, the mortgagor is actually you, the borrower in a mortgage agreement. You are borrowing from the mortgagee, your lender.
It sounds straightforward — the fees and other payments due when home sale is finalized. But what goes into them can be a bit murky. As a homebuyer, you’ll be paying more of of these fees than the seller. The amounts themselves vary, but according to Realtor.com, your buyer closing costs should cover a loan origination fee, credit report, loan underwriter, home inspection and appraisal, title search (to make sure it’s in the free and clear), survey fee (except townhomes), and taxes — that’s right, you pay taxes on the purchase of your home, often referred to as documentary stamps. SmartAsset has a handy calculator for how much these costs could run you, but it’s typically between 2% and 5% of the home’s value.
If you’re hoping to soon buy a home, you should already have been preparing your down payment, likely for several years. But just in case, a down payment is money you pay the seller at the time of the home’s purchase, often about 20% of the home’s value. A larger down payment ensures smaller monthly mortgage payments, while a lower down payment (subject to credit and lender) will be more manageable to save up but will lead to higher monthly payments and likely added private mortgage insurance (PMI).
Simply put, escrow is money that a third party holds while a buyer and a seller negotiate a transaction. So, as the buyer, you would put money in escrow, or an escrow account, and it wouldn’t be released to the seller until the deal is final. Many mortgage lenders also require escrow accounts to hold monthly contributions to insurance or property taxes that would be released when the bills come due.
An optional, informal process of speaking with a mortgage lender about your debts, income, and assets to find out how much the lender would allow you to borrow. If you aren’t sure how much house you can afford, this is a helpful step to narrow your search. It doesn’t, however, guarantee approval, as they aren’t double-checking the information you’ve provided.
This step is also optional, but it will make you a more attractive candidate when a seller is deciding between offers. For preapproval, you’ll fill out an actual mortgage application and submit to a financial background check. This will grant you tentative approval for a maximum loan amount and give you an idea of your likely interest rate.
This is far from being an all-inclusive list of potentially disorienting terminology, but it can serve as a solid basis from which to ask further questions. If your real estate agent is every getting too confusing, don’t be afraid to ask for clarification. It’s crucial that you understand what you’re paying for, and what you’ll be responsible for paying for in the future, so ask questions often and don’t shy away from doing a bit of your own research.
Sam Radbil is a contributing member of the marketing and communications team at ABODO, an online apartment marketplace. ABODO was founded in 2013 in Madison, Wisconsin. And in just three years, the company has grown to more than 30 employees, raised over $8M in outside funding and helps more than half a million renters find a new home each month.