You made it through the complex and lingo-infused process of shopping for and purchasing a home. Whether that was five months or 15 years ago, you may still have some questions about terms related not only to your home loan, but also to your home itself. We’ll shed some light by defining 12 terms that you may run across.


Home Finance and Insurance



Adjustable rate mortgage (ARM).

A home loan with an interest rate that can change over time, which means your monthly home loan payment can also change. Often, ARMs have a relatively low rate that is fixed (unchanging) for a specified period, such as the first three or five years of the loan. This can make them ideal for buyers who don’t plan to stay in the home too long or who expect to increase their income.


Making periodic payments of principal and interest to pay off a debt, such as a home loan, over a specific period of time.


A neutral third party who will hold onto financial obligations for two other parties. For instance, when you put a deposit or “earnest money” on a home you want to buy, that money doesn’t go to the seller directly. Instead, it is held in an escrow account until closing. Once the papers are signed, the money is released from escrow to the seller. Similarly, when you include your property taxes and homeowners insurance with your monthly home loan payment, those funds are typically held in escrow to be paid out when due.


The difference between your home’s value and the balance on your home loan — essentially, the share of your property that you actually own. For example, if your home is worth $400,000 and you owe $280,000 on your home loan, you have $120,000 in equity. You may be able to borrow against a portion of that equity through a home equity loan or line of credit.

Home value.

There are multiple ways to calculate a home’s value. Here are three of the most common:

· Assessed value is what the tax assessor says your home is worth. It’s the figure used to determine your property taxes.


· Appraised value is determined by a professional who evaluates the property and compares it to sale prices for similar properties. Lenders use the appraised value to decide the maximum they’ll lend for that property.


· Fair market value is simply the price of the property that the buyer and seller agree on, or what the home would sell for in the current market.



Private mortgage insurance (PMI).

Insurance that protects the lender in case the borrower defaults on their loan payments. This is unrelated to homeowners insurance, which covers your property and possessions against many types of damage. In most cases, borrowers must pay PMI if they put less than 20 percent down. PMI can usually be canceled once the borrower has more than 20 percent equity in their home, but this can vary by loan type.


Home Repairs and Improvements



Bearing wall.

A wall that supports a building’s roof or floor. It’s critical to identify these supports if you’re planning any major renovations — particularly those that involve tearing down walls.

Capital improvement.

A capital improvement is a permanent change that adds value to your property, lets you use the property in a new way or helps make the property useful for a longer period. For example, adding a bathroom or repaving the driveway would typically count as capital improvements. But basic maintenance and repairs wouldn’t.


Gives someone else legal rights to use part of your property. For instance, a utility company may have an easement that allows them to access — or even dig up — your yard to reach or maintain a power line or cable line. You need to know about any easements before doing any landscaping or home additions that might encroach on those rights.



Metal sheeting placed around angles or joints in roofs and exterior walls to help prevent leaks. For instance, you should see flashing around the base of a chimney where it joins the roof.


Stands for Seasonal Energy Efficiency Ratio and indicates both the energy efficiency and the cost of operation for a central air conditioning system. A SEER rating of 16 or higher is considered high efficiency. HSPF (Heat Seasonal Performance Factor) is the equivalent rating for heating systems.

Weather stripping.

Material (such as metal, wood or plastic) around doors and windows that helps prevent drafts. This is an important part of improving a home’s energy efficiency, and keeping your heating and cooling bills in check.
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