ARM? APR? Escrow? Are you confused by these real estate terms? We’re here to help! Gaining a basic understanding of these common real estate terms will help make the homebuying process a little less confusing. Here are some important real estate terms you should know before you start home shopping.
Real Estate Terms to Know
Annual Percentage Rate (APR): The annual interest rate for the loan. The APR typically includes the interest rate plus other fees and costs associated with the loan and is a good way to compare offers from different lenders.
Appraisal: The estimated property value of home in its current condition and neighborhood comp sales. Lenders use appraisals to make sure they don’t loan more than the home is worth.
Closing and Closing Costs: Closing is the formal ownership transfer of the home to the buyer. Closing costs are the various incurred fees and taxes that are not covered by the mortgage, including lender’s fees, transfer taxes, property taxes, etc. You can expect closing costs to be about 2-5% of the total purchase price.
Contingency: Specified conditions that must be met before the sale is finalized. Some common contingencies include passing home inspections, obtaining financing, or appraisal value.
Down Payment: The initial cash payment for a property that is a percentage of the home’s purchase price (usually between 3% – 25%) depending on the loan type.
Earnest Money: Money that serves as a signal that a buyer is serious about purchasing a home. This is usually submitted with the offer and is credited back to the buyer following closing. An experienced real estate agent will be able to explain any possible restrictions and stipulations.
Escrow: A third-party account created by the lender to hold funds until each party (buyer and seller) completes the necessary steps to settle a contract or home purchase.
Fixed Rate vs Adjustable Rate Mortgage (ARM): Fixed rate mortgages are conventional mortgages that are set at a fixed interest rate for the duration of the loan so your mortgage payments are relatively stable. In contrast, adjustable rate mortgages have flexible interest rates. Usually ARMs start with a low introductory interest rate for a set period before changing to a variable rate.
Preapproval vs Prequalify: Many homebuyers get these two terms confused. Preapproval determines how much the lender is willing to loan the homebuyer. Preapproval is the formal mortgage application process that requires submitting financial paperwork. In contrast, prequalifying simply determines an estimated loan amount homebuyers may qualify but does not act as a binding loan amount. Many homebuyers use the prequalification process to determine their budget.
Private Mortgage Insurance (PMI): a type of insurance policy the lender takes out on borrowers who have less than a 20% down payment. PMI protects the lender in case of default.
Title: The legal document that proves legal ownership of a property
There are just a handful of the terms you’ll encounter during the homebuying process. An experienced real estate agent will be able to explain additional terms and situations for you. If you’re ready to start the journey to your new home, visit us online to learn more about our communities, home styles and move-in ready homes.