Right now, you may feel like you need a crash course in real estate. This guide will give you a basic definition of the key vocabulary you're likely to encounter.
Adjustable-rate mortgage (ARM)
A home loan which ties your interest rate to a market index. As the index goes up or down, your interest rate and payments will also change at each scheduled adjustment period. These loans generally start out with an interest rate lower than a fixed-rate loan. This saves you money early on, and may help you qualify for a more expensive home. "Rate caps" limit the amount your interest rate can change during a given period.
Annual percentage rate (APR)
A measure of both the interest charged, as well as any other costs associated with the loan, such as discount points or lender origination fees, expressed as a single percentage rate. Because APR is designed to show you the total cost of a loan, it can be useful when comparing loans from different lenders.
A buyer's agent is a real estate professional who represents the buyer in the purchase of a home. There's typically no cost to the homebuyer for working with a buyer's agent, since he or she receives part of the commission paid by the seller when the house is sold. However, be sure to discuss compensation with any real estate agent before you start looking at homes, as conventions can vary by state and region.
Fees paid to the bank or third parties for services provided during the application and closing process. These fees vary, but typically range from 2–6% of the total amount of the loan.
Something of value that you can use to secure a loan. When the loan is for a mortgage, the collateral is always the home itself. The collateral becomes property of the bank if you default on your loan.
A numerical score or rating given to a person by a credit bureau that helps a bank determine how likely you are to repay a new loan. To calculate your score, a credit reporting agency considers factors such as how you pay your bills, your outstanding debt, how long you've had credit, the types of credit you've had, and how many times you've applied for credit.
Your credit score, plus details on outstanding obligations and payment history.
When a borrower stops making payments on a mortgage loan or fails to comply with other requirements of the mortgage.
The amount of money a borrower puts down toward the cost of the home to secure a mortgage. Some lenders require a down payment of 20% to avoid mortgage insurance. The amount of the down payment may also affect the interest rate you pay.
The amount of the home's value above what you owe on it.
Some lenders require an escrow account to hold funds for earnest money deposits, property taxes and insurance. The account is generally established by the title company.
Exterior and interior home repairs
Depending on the age and type of your house, there may be periodic maintenance or repairs needed to keep your home in good condition. For example, electrical and plumbing maintenance may be needed, or interior and exterior painting may be needed to protect your home from the elements and maintain its appearance.
A type of home loan in which the interest rate remains the same for the length of the loan. The most popular kind of home loan.
A professional analysis of the market value of the property.
A visual examination of the readily accessible areas of a home by a certified professional who will provide an accurate evaluation of the home's condition at the time of purchase.
Homeowners Association (HOA) Dues
Fees paid on monthly basis to maintain common areas in multiple unit home structures. Most condominium and townhome developments, and many newer single-family subdivisions have HOAs, which are usually created when the development is built. Covenants, Conditions & Restrictions (CC&R's) are issued to each homeowner, and HOAs are established to maintain the quality and value of the properties involved.
A form of insurance that protects your property against loss from theft, liability, and most common disasters. Mortgage lenders often require a borrower to maintain an amount of homeowners insurance on the property that is equal to the amount of the mortgage loan or the insurable value of the improvements.
The money you pay a lender in exchange for a loan, expressed as a percentage of the amount you've borrowed.
A loan that is for a larger dollar amount than the limits set by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
Lawn and property maintenance
If your home has a yard with a driveway and landscaping, you will need to maintain the lawn and landscaping, plus handle any cleanup related to weather damage. You can do this work yourself or hire someone else to do it.
Loan origination fee
The amount charged by a lender or broker to begin a mortgage loan. A loan origination fee is usually one point, or 1% of the loan amount. For example, a one-point loan origination fee on a $100,000 mortgage would be $1,000.
A bank employee who serves as your day-to-day contact with a mortgage lender. In addition to helping you select the right loan for your needs, the Mortgage Banker can also help you decide whether to buy discount points, figure out what you can afford in a house, and complete your mortgage application.
The cost of moving all your furniture and belongings.
Points (discount points)
A portion of your interest that you pay to the lender upfront in exchange for a lower interest rate. One discount point is typically equal to 1% of the loan amount, paid at closing. For example, one point on a $100,000 loan would require an upfront payment of $1,000. There is no requirement to pay discount points. Generally speaking, the longer you plan to remain in a property or hold your mortgage, it is to your advantage to pay points.
A process whereby a lender tells you how much you would be qualified to borrow based on income, debt and asset information that you provide.
The amount you owe on your mortgage, not counting interest. In other words, it's the face amount of the loan minus any principal payments you have already made.
Private mortgage insurance (PMI)
An insurance policy that covers the bank in case you can't make pay your loan payments, and the bank can't recoup the entire value of the loan on the house in foreclosure. Banks will generally require that you get this insurance if you have less than a 20% down payment.
Taxes assessed on real estate by the local government. The tax is usually based on the value of the property (including the land) you own. Taxes are mainly used by municipalities for supporting local education, police/fire protection, local governments, and other local infrastructure.
The guarantee of a specific interest rate for a specific period of time.
A real estate professional that represents the seller, also known as a listing agent. If you are working with a buyer's agent, you generally won't have any direct contact with the seller's agent. However, your agent will work closely with the seller's agent on your behalf.
Also known as "closing," this is the process whereby the property changes hands from the seller to the buyer, after both parties fulfill a set of conditions.
An evaluation of pest damage.
Insurance against a claim on the property. The lender will usually require that you insure them against this and, for not too much more, you can also insure yourself.
Utilities and fees
Regular water, gas, electricity, sewage treatment, and garbage pickup fees.