Escrow

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.

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.

Principal

Principal is the original amount of money you borrow for your mortgage, not including interest. Each monthly payment reduces your principal balance, which in turn reduces the amount of interest charged in the following month. As you pay down the principal over time, you build equity in your home. On a $400,000 mortgage, the entire $400,000 is the principal, and the total amount you repay over the life of the loan will be the principal plus all accumulated interest.