The Real Estate world is full of words and phrases that you will probably not hear very often in other walks of life. Hopefully the terms below will help shed some light for you.
Adjustable Rate Mortgage (ARM) - The interest rate of this Mortgage type will fluctuate yearly. The Mortgage company will notify you of the change once per year. The maximum amount that it may fluctuate yearly is set when the loan is first made. (This is different from a Conventional or other loan time where the rate is locked for the life of the loan.)
Annual Percentage Rate (APR) - This is a broader measure of what it takes to borrow from a lender. The APR includes the interest rate that will be charged on your loan, as well as lender points, mortgage broker fees, and any other charges that may be assessed to get the loan. Usually this will appear on your Closing Disclosure and be slightly higher than your Interest Rate.
Appraisal - The Appraisal is a report performed by a certified Home Appraiser. This is done in order to ensure that the property is worth the amount of the purchase price. This is often a requirement when there is a lender involved in the transaction because the lender wants to make sure that the value of the home supports the price being paid.
Association Fee / HOA Fee - Condominiums, Town homes, and some Neighborhoods will have an Owner's Associations. The Association will charge a monthly fee that will be used for maintaining common areas and other amenities owned or used jointly by all owners.
Balloon Mortgage - A mortgage that offers a lower monthly payment during the repayment term, however at the end of the mortgage repayment period, there will remain a sum of money still owed which will be due immediately.
Closing - The point where you sit down with your Closing Attorney to look over and sign all of the paperwork from the purchase or sale of your home. It is in your best interest to ask your attorney any questions that you have and to make sure that you walk away from the closing with a sense that you have learned something about your mortgage and the agreements you have just signed. Having a great closing attorney makes the transaction smooth and seamless. Once the closing is complete and the money changes hands, the closing attorney will record the new Warranty Deed to the buyers and the home will be transferred.
Closing Costs - This is a list of all of the fees, charges, and expenses associated with the purchase or sale of a piece of property. Some examples would be the Loan Origination charges, the Credit Report, the Flood Certification, the Closing attorney fees, transfer taxes, etc.
Closing Disclosure (CD) - The CD breaks down all of the closing costs, the loan figures and important details of your loan. It is basically a quick reference for the future, it contains your payment information and your loan information. This will the one of the first documents you review in the closing and the attorney should walk you through it.
Cloud on Title - See "Title" below.
Collateral - In the home buying process, when you obtain a loan, the home itself is put up as collateral, which means that it is being used to secure the promise to repay the loan. If you do not repay the loan, then the lender can foreclose on the property to be re-paid.
Commission - The Commission refers to the amount of money your realtor is paid for the work they have done in assisting you in the home buying process. In my local market, the standard is that if there are agents on both sides, the commission that each receives equals to 3% of the purchase price.
Comparables - A Realtor can run Comparables (or Comps) on similar homes in your neighborhood to see what the sales trends have been for that area and home type. This is a very good way to figure out what your home's value is so you can analyze if it is a good time to sell, or if it may be the right time to refinance.
Contingencies - These are things that give the Buyer or Seller the ability to walk away from a Contract. A good example would be if there is a contingency clause in the contract that states "The Seller has 14 days from the signing of the contract in order to put a new roof on the home." If the Seller doesn't have it done in that time, then the Buyer could potentially walk away.
Counter Offer - The initial Purchase Contract sent from the Buyer to the Seller is not final until both parties sign. If the Seller wants to work with the Buyer, but thinks something should be negotiated further, they can respond with a Counter Offer to the Buyer to see if the Buyer wants to accept the contract with the Seller's amended terms.
Debt to Income Ratio - When you apply for a mortgage loan, one of the first things a Lender will do is pull your credit score to see what your make each month, how much you spend each month on expenses, and how much you owe to other creditors. In other words, how much of your income goes to your debt. This helps them to determine the amount that you can spend on a mortgage payment monthly.
Deed of Trust - Often in a real estate transaction, a home buyer will need to borrow money in order to purchase a home. The borrower receives money from the lender in order to purchase the home and in exchange gives the lender a promissory note. The Deed of Trust (or in some states the Mortgage) is used as security for insuring the promissory note is repaid. The lender gives the borrower money to purchase, the borrower gives the lender a promise to repay, the borrower deeds the property to a Trustee who holds a legal interest in the property, and should the borrower default on the promise to repay, the Trustee may foreclose on the property in order to ensure the lender is paid back.
Down Payment - A buyer may choose to pay at closing either a set amount or a percentage of the purchase price as a Down Payment. Most mortgage lenders will agree to loan a Buyer a certain percentage of the purchase price as a Mortgage, but not 100% of the sales price, so it is up to the Buyer to be able to fund the remainder. Depending on the loan type and the purchase type, this can be anywhere from 3% to 20% that the buyer must pay at closing.
Down Payment Assistance - This is a program that is available on a Federal, State, and sometimes even local level, that offers funds to buyers who may have trouble coming up with enough money to put down toward the purchase of a home. It is usually in the form of small, secondary loan, with zero or minimum interest, that is repaid in 5, 10, or 15 years and often has some form of forgiveness built in as well.
Earnest Money - Funds that the buyer gives to the Seller's Closing Attorney or Realtor to hold until closing. The purpose is to show the Seller that the Buyer is serious enough about the purchase to put some money on the line. Most often when a contract falls apart the Buyer gets their Earnest Money back, but not always, so a Buyer should be aware that there are times where this can happen.
Escrow - This word means "to hold funds for another," or in other words, if someone is holding funds in an escrow account they are taking possession of the funds, but not an ownership, they are simply holding the funds for another. Attorney's have Escrow accounts to hold earnest money and Buyer's closing funds. Lenders have Escrow accounts to hold taxes and insurance, to pay these on behalf of Buyer's each year.
Equity - The difference between the value of the home and what is owed. For example, if a home with a value of $100,000 has a mortgage for $75,000, this means that the home is worth $25,000 more than what is owed, and this is the equity. When it is time to sell, the equity can be a major help in putting down funds toward the purchase of the next home.
Federal Housing Administration (FHA) - The Federal Housing Administration provides mortgage loans to people with lower credit scores, thus making home ownership possible for more people.
Fixed Rate -Simply put, this just means that the interest rate of your mortgage loan will stay the same for the entire duration that you have the mortgage.
Home Equity Line of Credit (HELOC) - A HELOC is a form of loan where you are borrowing money based on the amount of equity there is in the home. You can never borrow more than 100% of the value of the home (usually not even that much). The lender cannot force you to use the money for a specific purpose.
Home Inspection - This is so very important. I'll say it again. So very important. The home inspection is your opportunity to look for any and all flaws in the home prior to purchasing it. It gives the Buyer a chance to negotiate with the Seller for the repair of anything that the Home Inspector identifies. Sometimes a lender may also look at the home inspection and decide that there are repairs that they require in order to move forward with the loan.
Home Warranty - In my state of Tennessee the standard practice is that the Seller often provides the buyer with a Home Warranty as part of the sale transaction. The home warranty is good for a fixed amount of time and that covers repairs of some of the things that could go wrong in the home after the buyer moves in.
Hybrid Loan - What is a Hybrid Loan, I'll tell you, IT'S A BAD IDEA! Take my word for it, don't do it. A hybrid loan is often referred to as an ARM loan or Adjustable Rate Mortgage Loan which means that you are being offered a loan with a low initial repayment period and rather low initial interest rate, but once the adjustment period begins, the rate may climb over time to a rate that is unfeasible.
Interest Rate - It will be locked in for the life of the loan or may be adjustable based on the loan type. This is how the bank makes money off of the loan and why they are willing to loan money for such extended periods of time.
Mortgage Insurance (or "Private Mortgage Insurance" or "PMI") - When a borrower asks a Lender on a Conventional Loan to provide a mortgage in an amount greater than 80% of the value of the loan, then the Lender will most likely require the Borrower to pay for PMI monthly, until that 80% point is reached. On an FHA loan the PMI may be set for the entire duration of the loan. PMI is put in place to protect the Lender from a potential default from the buyer, as a default in payments when the loan is higher than 80% of the value could potentially cause the lender to not be fully paid back as a result of the foreclosure sale.
Note - The Note is the promise to repay the loan. The original document will be sent to the Mortgage company after closing where it will be held until the loan is paid in full.
MLS (Multiple Listing Service) - This is the system that allows all Realtor's to post homes that are for sale. Only Realtors have access to this service, but there is often a free local version that is accessible to everyone.
Points - Also known as "Discount Points" - Points are a means to lower your fixed interest rate for the life of the loan by paying an upfront fee at closing to the lender. Typically the lender will agree to lower the interest rate by a set amount based upon the amount of points purchased. It is a good idea to ask about the difference in monthly payment amounts are with or without the points, in order to see what is your best option.
Pre-Approval - Before asking your Realtor to see a home, get pre-approved. There are many advantages to getting pre-approved, the biggest are that you as a Buyer know exactly what your budget should be and also being able to provide the pre-approval letter to the Seller shows them that your offer is valid because you can afford the sales price.
Principal - This is how much of the original loan amount that is repaid each month with the mortgage payment.
Principal and Interest - On the Closing Disclosure sheet at closing you will see these listed together, the reason is that the Mortgage company will collect the same amount monthly over the life of the loan, if you have a fixed interest rate, to go toward the Principal and Interest and will adjust the percentage of allocation to each over the course of the loan. Principal refers to the repayment of the amount borrowed and Interest refers to the money being paid back monthly as a fee for receiving the loan.
Property Taxes - These vary from City to City, from County to County, and from State to State. Some City's have property taxes, others don't. Most Counties have Property Taxes, and some States do. Property tax may be something as simple as charging 4.05% yearly of 1/4th of the assessed value of the property, as it is in Shelby County, Tennessee, or it could include a percentage, like above, coupled with taxes being collected on behalf of the local school district or something else.
REO (Real Estate Owned) - When a property goes up for Foreclosure and the lender who provided the loan (or their predecessor) is the highest bidder at the auction, then when that lender takes possession of the property it is classified as REO. It really would apply to any property purchased and held by a bank in this manner, but rarely will you see another bank bid on a property with a mortgage from a competitor.
Reverse Mortgage - This is a type of loan aimed at senior citizens. It is intended to let them borrow against the value of the home and built up equity, and to receive money each month rather than pay. These loans often mean that when the person dies, the bank takes ownership of the property, rather than a family member inheriting it. Be VERY careful in allowing a family member to sign up for this type of loan and make sure to do all your research before signing up.
Short Sale - If a borrower gets behind or is upside down on their mortgage and would not be able to sell the property for a price high enough to enable the payoff of the mortgage debt then they would either have to bring money themselves to the closing or request the lender accept less than the full amount owed in order to satisfy the loan and release the obligation. When the lender agrees to accept less and release the lien, this is called a short sale, because the payment is short of the amount owed.
Title - This means an ownership interest in property. When you receive ownership via a Deed, whether Warranty, Quit Claim, or some other form, you are taking an interest in that property. When buying the property you want to know that you (and any others buying with you) are getting a 100% interest in that property. The title search will reveal any Clouds on the title and the title attorney will work to ensure those clouds are gone before the transaction. A Cloud on Title simply means that there is something out there that would limit taking the interest to the property 100%, whether a judgment or mortgage, a mistake in a former conveyance, or person who had an interest who was not properly divested of their interest.
Underwriting - The underwriting department of the mortgage company are the ones who review your mortgage application. They will look at all of the details of the application and determine if there are any other factors or questions that need to be answered by the borrower.
Upside Down - This means that a person owes more on the mortgage than the value of the property.
I hope that this extensive, but not exclusive, list of terms helps you to better understand the real estate world.
If you feel that this information may help you or a client, please reach out. It is my mission to help others.
Jeremiah L. McGuire