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When it comes to purchasing a new home, you will encounter a lot of industry jargon that can perplex a first-timer. In order to feel confident and be well-informed when it comes to reading contracts, understanding your mortgage options, and making it through a closing, it is important to have some basic real estate language under your belt. A great agent will take the time to explain anything you might be unsure about, but to help you get ahead of the curve we have put together a list of some commonly used terms in real estate transactions to get you started:
ADJUSTABLE RATE MORTGAGE (ARM)
An ARM has an interest rate that can change during the term of the loan. These loans may start at a lower rate and then gradually increase over time but often have a limit on how much and how often the interest rate can change. With an ARM, your monthly mortgage payment will not be fixed over the term of your loan.
ANNUAL PERCENTAGE RATE (APR)
This is the annual rate charged for borrowing, expressed as a percentage that represents the actual yearly costs of funds over the term of your loan. An APR will be higher than your interest rate since it accounts for fees and loan costs.
Used by lenders to decide the limits of what they will lend for a property, it is when a licensed appraiser evaluates a property to determine its value based on size, age, condition, and comparison to recent sales of similar properties.
These are costs that are due at settlement that are not financed into your loan amount. They will vary depending on the cost of your home but usually include items like property taxes, homeowner’s insurance, appraisal fees, and title insurance.
Meant to protect the buyer or seller, a contingency is a part of the contract that releases said party of liability if certain terms are not met. For example, a buyer might make an offer on a new home, contingent that their existing home sells first.
This is the period after your offer on a home goes binding in which you have the opportunity to complete any necessary inspections, research the property’s history, and explore the neighborhood to ensure that you are willing to move forward with the purchase. The length of time can vary for this process but most due diligence periods do not last more than 14 days, during which time the buyer can withdraw their offer on a home without penalty.
EARNEST MONEY DEPOSIT
Also known as a Good Faith Deposit, this is a sum of money that you offer as a sign of your intent to purchase the home. The earnest money will be applied towards your down payment if all moves forward with the sale as planned. However, there are situations involving delays with closing or the buyer cancelling the contract for a reason not covered by a contract contingency in which the earnest money is forfeited.
An escrow account is where the company holding your mortgage will draw from to collect your monthly payments, interest, property taxes, and insurance. Typically, you will pay a portion of your yearly property taxes and insurance each month so when the bill is due, the funds are available in full in the escrow account and the lender pays on your behalf.
FIXED RATE MORTGAGE
Opposed to an ARM, an FRM locks in an interest rate for the entire term of the loan, between 15 and 30 years. The rate will not change with market changes and your monthly payment will stay constant.
MULTIPLE LISTING SERVICE (MLS)
This is a database service used by real estate agents to view and share the property details of homes on the market. It is only accessible by licensed agents and does require a fee to use.
During the loan application process, this is an in-depth inquiry by the lender into your financing that will include looking at pay stubs or income verification, running your credit, and issuing a letter stating the institution is willing to lend you up to a dollar amount, barring any appraisal issues.
Less binding than the pre-approval process, a pre-qualification does not guarantee that you will receive a loan and usually does not run the numbers regarding what you will be approved for. Based on what financial information you provide to the lending institution, they give you an idea of what amount you could qualify.
The actual amount borrowed to purchase a property. For example, if you purchase a $200,000 home, pay $10,000 towards the down payment, and finance the remaining $190,000 difference, your mortgage principal is $190,000.
PRIVATE MORTGAGE INSURANCE (PMI)
This is a requirement if your down payment is less than 20% as a way for the lender to help protect their investment. The cost will vary depending on the cost of your home and you can ask your lender to cancel your PMI once you have built 20% equity in your home.
There are specific laws that restrict where business can be located, whether you can add rental space, and what type of changes you can make to your property. During your due diligence period, it’s important to find out the zoning law impacting your property.