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Decoding Real Estate: Terms Homebuyers Should Know

Apr 6, 2017

Purchasing a home is an exciting milestone but it’s easy to become overwhelmed when it feels like people are speaking a completely different language. Here’s a quick overview of some of the important real estate terms you’ll hear why buying your new home.
Adjustable Rate Mortgage (ARM): a mortgage loan where your interest rate changes over time. Most ARMs begin with a low interest rate for a set period of time before becoming adjustable based on a fully indexed interest rate. An ARM is not the best option i you prefer a more consistent mortgage payment.
Annual Percentage Rate (APR): the true cost of your mortgage. APR includes the interest rate provided by your mortgage lender plus other fees and costs associated with the loan; this is why APR is usually higher than the interest rate.
Appraisal: an estimated property value made by a professional based upon the condition of the home, its initial purchase price and comparable recent sales. Lenders use a property’s appraised value to determine the limit they will lend.
Closing Costs: various fees and taxes incurred at closing that isn’t typically covered by a loan. Typically included are: lender’s fees, transfer taxes, prorated property taxes, origination feed, etc. and are about 2-5% of the purchase price.
Closing: also known as settlement, this is the legal sell and transfer of the property from the seller to the buyer.
Down Payment: the initial cash payment that is a percentage of the home’s purchase price (usually between 3.5% – 20%). The remaining balance of the purchase price is covered with the mortgage amount.
Escrow: a neutral third-party account that serves two purposes. During the buying process, escrow can refer to the holding of cash and documents until a sale is finalized and closed. Lenders may require homeowners to use an escrow account for the payment of taxes and insurance.
Fixed-Rate Mortgage: this is a more traditional mortgage than an ARM. Fixed-rate mortgages are set at the prevailing interest rate for the life of the loan. Meaning, aside from changes in property taxes and insurance, mortgage payments will roughly stay the same.
Pre-Approval (preapproved): often confused with prequalification, pre-approval is a more formal process of applying for a loan. Borrowers will know the maximum amount they can borrow from a lender. This commitment is valid if there are no changes in the borrower’s qualifications.
Pre-Qualify (prequalified): prepublication is an informal process of determining the estimated loan amount a homebuyer may qualify for.
Principal: the amount actually borrowed from the lender.
Private Mortgage Insurance: an insurance policy that protects the lender in case the borrower defaults on the loan. Lenders typically require PMI for buyers who have less than a 20% down payment.
This is just a partial list of all the real estate terms you’ll encounter during your home buying process. Hopefully this primer will help give you the confidence you need as you navigate this market with a trusted real estate agent who can explain all the other terms you’ll hear.
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