Big decisions · Module 3 of 4
Buying a home
Mortgages, pre-approval, home equity, and fixed versus adjustable rates.
Key terms in Buying a home
- Home equity
Home equity is the part of a property the owner actually owns, calculated as its current market value minus the balance of any mortgage or other debt secured by it. Equity rises as the loan balance is paid down and, in some markets, as the property's value increases. It can fall if prices drop. Lenders may allow borrowing against it through home equity loans and lines of credit.
Source: Consumer Financial Protection Bureau, What is a home equity loan?
- Mortgage preapproval
A mortgage preapproval is a letter from a lender stating that it is generally willing to lend a buyer up to a certain amount, based on stated assumptions. Lenders use the terms preapproval and prequalification in different ways, but a preapproval is usually based on verified information. The letter is not a final loan commitment, and the loan can still change or be denied.
- Debt-to-income ratio
The debt-to-income ratio (DTI) is a percentage found by dividing a person's total monthly debt payments by their gross monthly income. Lenders use it to judge whether a borrower can handle a new loan alongside existing obligations. Acceptable levels differ by loan type and lender, and a mortgage payment is counted as part of the debt side of the calculation.
Source: Consumer Financial Protection Bureau, What is a debt-to-income ratio?
- Adjustable-rate mortgage
An adjustable-rate mortgage (ARM) is a home loan whose interest rate can change over time. Many start with a fixed introductory period, after which the rate resets at regular intervals based on a market index plus a margin set by the lender. Because the monthly payment moves with the rate, it can rise or fall, and caps in the contract limit how far the rate may change.
Every term on Lever is in the money glossary.
About this module
Buying a home is part of Big decisions, one of 15 subjects in Lever. It’s a short run of 7 lessons, about 18 minutes in all, so you can finish it in one sitting.
Every lesson takes one idea at a time. You read it with the math worked out step by step, answer a question that puts it to use, then see why the right answer is right and why the others aren’t.
It’s for anyone who was never taught this, and you don’t need to know anything first. Every lesson is free. Lever works out what you already know, so you can start here or let your path bring you to it.
More in Big decisions
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1
Renting your first place
How much rent you can afford, deposits, leases, splitting rent fairly, and renter’s insurance.
7 lessons -
2
The number you can move
Negotiating your salary and big purchases, leasing versus buying, and the questions to ask first.
7 lessons -
4
What a home really costs
Closing costs, mortgage insurance and all the costs of owning that never show up on the listing.
5 lessons
Try this module
It’s part of Big decisions. Lever will bring it to you when you’re ready, or you can go straight there.