Amortization? Points? Contingency?
If you are in the market to buy or sell a home, chances are, you've heard these terms being bandied about by real estate agents, mortgage lenders, or other industry professionals. But, it isn't always clear what they mean. Fret no longer! Below is a comprehensive list of the most common terms in a real estate transaction.
Glossary of Real Estate Terms
Adjustable rate mortgage (ARMs) – This type of mortgage usually has a lower initial rate (for a set number of years), then the rate may go up or down, depending on the specified index rate used for determination. Usually preferred for short-term ownership, the repayment period for ARMs are typically 5, 7, or 10 years, but they can be issued for longer time periods.
Amortization – The repayment schedule of a loan, including payments of principal (the original amount borrowed) and interest. An amortization schedule displays, in a table format, the amount of principal and interest included with each payment, along with the remaining loan balance.
Appraisal – The estimated value of a property based on a qualified appraiser’s written analysis. Banks typically require appraisals before issuing loans to ensure the estimated value of the property adequately exceeds the amount borrowed.
Assessed value – The value of a property assigned by a governing authority to levy a tax or fee on the property owner.
Buyer’s agent – A real estate agent who represents the interests of homebuyers. An Accredited Buyer’s Representative (ABR®) is a buyer’s agent who has earned the ABR® designation by successfully completing specialized coursework and demonstrating experience in representing buyers. The ABR® designation is awarded by the Real Estate Buyer’s Agent Council (REBAC).
Closing costs – Incidental fees associated with completing real estate transactions, potentially including attorney’s fees, credit report fees, document preparation fees, deed recording fees, appraisal fees, etc.
Contingencies – Particular conditions that must be met prior to closing a real estate transaction such as a home inspection (to ensure the home has no serious defects), a financing contingency (which releases a buyer from the sales contract if their loan falls through), or a contingency that a buyer must first sell their current home. In general, the fewer contingencies required of a seller, the stronger a buyer’s negotiating position, in terms of getting the best price.
Earnest money – Also called a “good faith” deposit, these are funds held by a neutral party to demonstrate the buyer has serious interest in purchasing a property.
FHA loan – Loans insured by the Federal Housing Administration (FHA). With attractive financing rates and less stringent lending requirements than conventional mortgages, FHA loans are often appealing options for buyers with lower credit scores and/or smaller down payments. They do, however, require two types of mortgage insurance: an upfront premium and an annual premium, which is wrapped into monthly mortgage payments.
Fixed-rate mortgage – A conventional loan with a pre-determined (or “locked in”) interest rate for the duration of the loan repayment period. They are traditionally 30 years in length but can be issued for 15 years, 10 years, or another duration.
Home inspection – A thorough professional examination (at the buyer’s expense) that evaluates the structural and mechanical condition of a property (plumbing, foundation, roof, electrical, HVAC systems, etc.). This highly recommended step is a common contingency clause in real estate sales contracts. If the inspector identifies issues that may be expensive to remedy, these can be revisited with the seller before proceeding with the sale.
Listing – The printed (or digital) description of a property for sale. Listings may include details about the property, the home (number of bedrooms, baths, featured rooms), other structures, the price, and photos.
Offer – A formal request to buy a home. See sales contract.
Points – Prepaid interest on a loan, equal to one percent of the loan amount. The advantage of paying points up front is that a lower interest rate can be secured for the lifetime of the loan. This may be a good deal if a buyer plans to stay in the home for many years (so the long-term interest savings outweigh the initial cost in points).
Pre-approval (loan) – A lender’s written guarantee to grant a loan up to a specified amount (subject to receiving full documentation). Pre-approval for a loan can strengthen a buyer’s negotiating position with a seller.
Pre-qualification – Less “official” than a mortgage pre-approval, banks offer (at no cost or obligation) pre-qualifications to estimate the amount a buyer may be able to borrow. It is often used early in a buyer’s search to help determine a reasonable price range.
Private mortgage insurance (PMI) – A monthly insurance payment that may be required if a buyer’s down payment is less than 20 percent of the home’s purchase price. It protects lenders against loss if a borrower defaults.
Sales contract – A legal agreement between a buyer and seller to purchase real estate, for a specified price and terms, for a limited time period (also called a purchase agreement or a binder). When initially presented to a seller, this document is often called a purchase offer. Once the seller accepts (or the buyer accepts the seller’s counter offer), it becomes a legally binding sales contract.
Seller’s agent – The real estate agent who represents the seller of a piece of property. Their job is to act in the best interests of the seller, marketing their home to potential buyers and negotiating on the seller’s behalf.
Title insurance – This type of insurance is acquired to protect against any unknown liens or debts that may be placed against the property. Before issuing title insurance, public records are searched to ensure that the current owner has legal rights to the title as well as the legal ability to sell the home and that no liens are held against the property.
Although there may be other terms used, this should get you through those meetings with the industry types. And remember, if you are looking to buy, sell, or invest we would love to chat! Schedule your 15-minute discovery call today!
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