When buying your first home, you may feel overwhelmed with the complex terminology used in the documents you need to sign. The real estate world is filled with lingo that can be confusing and intimidating, to say the least. By familiarizing yourself with these words, you will be able to search for housing, navigate the lending process and get a mortgage with more confidence.
In real estate, you will find that many terms are used in other contexts as well. However, it is important that you not only understand the definition of these words, but also how they relate to your homebuying endeavor. For example, “appreciation” can have several different meanings, but in the context of real estate, it refers to the value of property increasing over time. Learn all of the terminology you will need to know in order to purchase your first home by going over the words below.
- Acceptance, or mutual acceptance, refers to the point in time where a buyer and seller both agree on the sale of a house. The agreement, oftentimes referred to as a sales contract, is put into writing at this time. After the transaction is accepted by both parties, it becomes a binding contract and there are consequences if either party backs out of the agreement after it is signed.
- Annual percentage rate (APR) is calculated when you apply for a mortgage from a lender. The APR is an estimation rather than a reflection of your actual monthly mortgage payment. All lenders are required to quote an APR so that you can calculate the true cost of borrowing money from each bank you are considering for home financing.
- Closing is the final step in a home purchase. In most cases, closing takes place during a formal meeting in an office setting. The buyer, seller, and the agents of each party are present at the meeting. During the closing, both parties will sign the necessary documents and transfer any agreed-upon payments.
- Closing costs are a type of fee that you pay in order to cover all of the steps required in purchasing a home. Fees are usually charged for obtaining a loan, paying your real estate agent, insurance, taxes, appraisals and more. Expect to pay between two and four percent of the total purchase price when covering closing costs. Sellers also have to pay closing costs, which tend to be between three and nine percent of the total selling price.
- Contingencies are conditions that the buyer or seller requests in order to complete a transaction. For example, the buyer may ask the seller to repair damage to the home before he or she finalizes the purchase. Buyers will usually be in a better position if they ask for fewer contingencies, as this will give them more power to negotiate for a good price on the home.
- Counteroffers are made when one party disagrees with the original offer given by the other party. For example, a buyer can offer $300,000 for a home, and if the seller does not want to take this offer, he or she can reject the offer and come back with a different price, such as $310,000. When made, a counteroffer voids the original offer.
- Disclosure is when the seller states physical defects or concerns with his or her house. By law, certain issues need to be disclosed. For example, the presence of lead-based paint needs to be reported so that buyers can be aware of the associated health risks.
- Escrow is when something of value, such as a home, is held by a neutral third party during a transaction. Escrow protects both the buyer and the seller. After a deal is made on a home, the buyer’s payments will oftentimes be placed into an escrow account rather than going directly to the seller. Similarly, the deed to the house will go through an escrow officer rather than being given directly to the buyer. If anything goes wrong during the sale, both the buyer and seller will have more protection because the transaction is overseen by a neutral party.
- Fixed-rate mortgages are the most common types of home loans. When you have a fixed-rate mortgage, your interest rate will stay the same for the entire time that you pay off your loan or refinance your home. In general, your payments will also remain steady unless your property taxes or insurance rates change.
- Home inspections are conducted by a professional who will walk through a house and evaluate its structural and mechanical integrity. A buyer should have this examination completed before making a purchase, as it can reveal issues that affect the value of the home.
- Private mortgage insurance (PMI) is usually required when a homebuyer does not have enough money to make a 20 percent down payment. This insurance will reimburse a lender if the homeowner cannot make loan payments and the home goes into foreclosure.
- Real estate agents commonly show houses to prospective buyers and handle much of the administrative work associated with buying and selling houses. Agents must be licensed in the state where they work to receive compensation in the form of commission. In other words, a real estate agent must sell houses in order to receive payment for their work.
- Real estate brokers work above agents. A broker handles details such as negotiating the price of a home. In some states, the terms for agents and brokers mean the same thing. In these cases, a managing broker is in charge of lower-level agents and brokers.
- Realtors, or technically REALTORS, are members of the National Association of REALTORS® (NAR). A realtor is similar to an agent, but not every real estate agent is an official realtor or vice versa. Realtors can hold similar positions to real estate brokers or agents. The main difference is that realtors are members of a national association. One benefit of this association is that it requires members to abide by a strict code of ethics that does not necessarily apply to independent agents or brokers. This industry regulation is attractive to both buyers and sellers, as it creates a uniform standard of service that may not be found elsewhere.