Mortgage Glossary
Earnest Money
Earnest money is a deposit made by the buyer when submitting an offer on a home to demonstrate serious intent to purchase. It is typically 1 to 3 percent of the purchase price and is held in an escrow account until closing. If the sale goes through, the earnest money is applied toward your down payment or closing costs. If the deal falls through for a reason covered by your contract contingencies, you can usually get the deposit refunded.
Related Terms
Escrow
Escrow refers to a neutral third-party account used during the home buying process and throughout the life of your mortgage. During the purchase, an escrow company holds funds such as earnest money until all conditions of the sale are met. After closing, your lender may maintain an escrow account to collect and pay your property taxes and homeowners insurance on your behalf as part of your monthly mortgage payment.
Down Payment
The down payment is the upfront cash you pay toward the purchase price of a home, with the remainder covered by your mortgage. Down payment requirements vary by loan type: conventional loans may require as little as 3 percent, FHA loans require 3.5 percent, and VA and USDA loans offer zero down payment options. Putting at least 20 percent down on a conventional loan allows you to avoid private mortgage insurance. A larger down payment also reduces your loan amount, resulting in lower monthly payments.
Closing Costs
Closing costs are the fees and expenses paid at the time a mortgage transaction is finalized. They typically range from 2 to 5 percent of the loan amount and include charges such as the appraisal fee, title insurance, origination fees, attorney fees, and prepaid items like homeowners insurance and property taxes. Closing costs can sometimes be negotiated with the seller or rolled into the loan amount.
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