What are Seller paid closing costs? What does a 2-1 buy down mean? We go into answering these two questions and how they would work in an actual deal.
Real Estate Terminology
Real estate terminology is complicated, extensive and can be confusing. There is nothing more intimidating than sitting down with someone and have them spit out a few terms that you have no idea what the meanings are. Hopefully, you’re here and interested in getting slightly caught up on some of the lingo we use in real estate. Let’s dive in.
When a seller accepts an offer from a buyer, that offer is contingent upon the buyer’s ability to meet certain conditions before finalization of the sale. Contingencies might include the buyer selling their home, receiving mortgage approval, or reaching an agreement with the seller on the home inspection.
Adjustable-rate mortgage (ARM):
The interest rate for an adjustable-rate mortgage changes periodically. You might start with lower monthly payments than you would with a fixed-rate mortgage, but fluctuating interest rates will likely make those monthly payments rise in the future.
An appraisal on your home is an unbiased estimate of how much a home is worth. When buying a home, the lender requires an appraisal by a third party (the appraiser) to make sure the loan amount requested is accurate. If the home’s appraised value is below what the buyer has offered, the lender may request the buyer pay the difference in cost.
A buydown is a mortgage-financing technique lowering the buyer’s interest rate for anywhere from a few years to the lifetime of the loan. Usually, the property seller or contractor makes payments to the mortgage lender lowering the buyer’s monthly interest rates, which, in turn, lowers their monthly payments.
A cash-out refinance, also known as a cash-out refi, is when a homeowner refinances their mortgage for more than it’s worth and withdraws the difference in cash. To be eligible for this kind financing, a borrower usually needs at least 20% in equity.
Closing costs are usually comprised of between 2-5% of the total purchase price of the home. According to a recent survey by Zillow, the average homebuyer pays approximately $3,700 in closing costs. These fees are paid on or by the closing date.
Discount points are also known as mortgage points. They’re fees homebuyers pay directly to the lender at the time of closing in exchange for reduced interest rates which can lower monthly mortgage payments.
Earnest money deposit:
Earnest money is a deposit (usually 1-2% of the home’s total purchase price) made by a homebuyer at the time they enter into a contract with a seller. Earnest money demonstrates the buyer's interest in the property and is generally deducted from your total down payment and closing costs.
An easement grants someone else the legal right to use another person’s land or property while leaving the title in the owner's name.
Home equity is the part of your property you actually own. While you do “own” your home, your mortgage lender has interest in the property until it’s paid off.
To calculate your home’s equity, subtract your outstanding loan balance from the current market value of your property. Home equity will increase as you pay down your loan or the market value of your home increases.
Federal Housing Administration (FHA) loans have been around since 1934 and are meant to help first-time homebuyers. The FHA insures the loan, making it easier for lenders to offer the homebuyer a better deal, including a lower down payment (as low as 3.5% of the purchase price), low closing costs, and easier credit qualifying.
Home equity line of credit:
A home equity line of credit (HELOC) provides a revolving credit line that can be helpful in paying for large expenses or consolidating higher-interest rate debt on loans -- like credit cards.
Conforming loan limits cap the dollar value that can be backed by government-sponsored programs. A jumbo mortgage exceeds these conforming loan limits, which are tied to local median home values.
Qualifications for these loans are more stringent and the loans themselves are manually underwritten to mitigate risk to the lender.
In real estate, the lender refers to the individual, financial institution, or private group lending money to a buyer to purchase property with the expectation the loan will be repaid with interest, in agreed upon increments, by a certain date.
A property lien is unpaid debt on a piece of property. It's a legal notice and denotes legal action taken by a lender to recover the debt they are owed. It can come from unpaid taxes, a court judgement, or unpaid bills and can slow down the homebuying process when unattended.
A mortgage banker works directly with a lending institution to provide mortgage funds to a borrower. They can only obtain funds from a specific institution and are responsible for each part of the mortgage process, including property evaluation, financial due diligence, and overseeing the application process.
A mortgage broker shops several lenders, acting as a middle man between lending institutions and the borrower. A broker can compare mortgages from several different institutions, giving the borrower a better deal.
If a homebuyer makes a down payment of less than 20% of the purchase price of a home or is the recipient of an FHA or USDA loan, they’ll usually be required to pay mortgage insurance. It lowers the risk of a lender giving you a loan, but it also increases the cost of the loan.
Planned unit development:
A planned unit development (PUD) is a housing community made up of single family residences, townhomes, and condominiums -- as well as commercial units.
PUDs offer many common areas owned by the HOA and amenities beyond what normal apartment buildings or townhomes offer, including tennis courts and outdoor playgrounds.
Before submitting an offer on a home (or even engaging with a real estate agent) you’ll likely be required to get pre-approved. This means a lender has checked your credit, verified your information, and approved you for up to a specific loan amount for a period of up to 90 days.
Unlike pre-approval, pre-qualification is more of an estimate of how much you can afford to spend on a home.
The principal of a loan is the amount of money owed on that loan. As you make monthly mortgage payments, your principal -- in theory -- goes down.
The amount of interest you pay on a monthly loan will affect how much of your monthly mortgage payment goes to paying down the principal. A high interest rate means you’ll pay less on the principal, meaning you’ll pay more on your loan over time.
There are many more terms that one might get familiar with, but as a first time home buyer, it is very important to get an understanding of some of these terms. Having a knowledgable real estate agent is extremely important for being able to discuss define and navigate terms nad conditions in purchasing property.