We know mortgage speak can get thick. Here’s a quick guide to cutting through the confusion.


Earnest Money

The homebuying process isn’t just a big deal for the buyer—it’s a significant step for the seller as well. Sellers actually take on a bit of risk when they sell their homes. Earnest money is a deposit that helps mitigate some of the seller’s risk. This cost is separate from a down payment, closing costs and other fees, and it’s actually not necessarily required in every real estate transaction. It could be something to look into in a competitive seller’s market as a way of signifying to the seller that you’re a trustworthy buyer. It’s important to note, though, that earnest money isn’t an under-the-table bribe situation; this money is usually 1-5% of the asking price of the home, and when it’s offered, it gets held in escrow until the sale is complete. At that point, the earnest money can get applied to your total closing costs . The seller doesn’t just get to keep that money on top of the sale price of the home. However, if your transaction falls through, the seller will likely be able to hang on to the earnest money as a consolation.


In most cases, the word “equity” refers to an ownership stake. That’s essentially the case with mortgages, though a bit different. You own your house completely when you close, but the bank that holds your mortgage still technically has a financial stake in the property, known as a lien. As you pay off your mortgage, the amount of money you owe on your home decreases, which therefore reduces the financial stake the bank has in the property. That’s equity—the amount by which you own your home free and clear. Equity is calculated by measuring the home’s market value against the amount you owe. This means that you can also gain equity in your home if its assessed value goes up over time. If your house was worth $200k when you bought it, but is worth $400k now due to market changes and local development in your area, you have $200k in equity that you didn’t even have to pay for!


Houses aren’t cheap, and the transactional process of closing doesn’t happen in the blink of an eye. With these two things in mind, it’s helpful to have a third party handle documents and funds in real estate transactions. Escrow is that third party—they aren’t involved in either side of the transaction, and they’re licensed professionals whose job it is to handle these sorts of transactions. This helps ensure that the transaction will run smoothly and equitably for everyone involved.


Fixed-Rate Mortgage

A fixed-rate mortgage is one that keeps the same interest rate throughout the lifetime of the loan. This is a particularly beneficial feature if interest rates are unusually low when you purchase your home—you’ll be able to lock in that rate for the duration of your mortgage. Fixed-rate mortgages contrast with adjustable-rate mortgages . Neither type is inherently better than the other, so make sure you consider all available options with your Mortgage Advisor before deciding which option to go with.


Gross Monthly Income

Eligibility for mortgages is based on the total amount of money you make in a month before taxes. This is your gross monthly income—the total value of what you earn through labor or investment, prior to any expenses (including tax) being deducted. Your post-tax income is called net monthly income.