Helpful Terms for First Time Home Buyers
The purchase of your first home is an incredibly exciting milestone. You’ve probably done a mental architectural design of your dream house a thousand times in your head – envisioning the bedroom layout, the kitchen structure, and just the overall aesthetic of the home. While we would love to say that the purchasing process is as easy as browsing the local listings, picking one that best matches your dream home, and moving in a month later – there is a bit more to it than that, and many are unprepared.
The home purchasing process is a machine with several moving parts, and for some home buyers; it can be a complicated and stressful affair. Understanding and getting familiar with certain real estate terms will greatly help in making the experience much more enjoyable. We have put together a real estate glossary of definitions of common terms you will hear when venturing into the world of real estate that aim to help give you more clarity and understanding of the process.
1. Adjustable-Rate Mortgage (ARM)
As the name suggests, an adjustable rate mortgage is a loan where the interest rate can adjust or change over the lifespan of the loan. The interest rate and the monthly payment amount move together. If the interest rate increases, then so does the amount of your monthly payments. The frequency in which the mortgage rate adjusts will vary and depend on the terms set by the loan lender. This is a more volatile mortgage structure compared to the fixed rate mortgage we will discuss later in the article.
This is the repayment of a loan over a period of time, done in monthly systematic increments. The monthly mortgage payment is made up of primarily two components: the principal and the interest.
In the case of real estate, an appraisal provides the market value of a property based on the viewpoint of licensed appraising professionals. Many factors contribute to the determination of the property’s value such as recent trends in the market, square footage, and many others. The process helps home buyers avoid paying more for their home than professionally valued, and helps lenders avoid lending more money than needed for the mortgage.
4. Assessed Value
An assessed value determines the appropriate property tax a homeowner has to pay. The assessed value is traditionally determined by a member of the municipality and is usually conducted on an annual basis. The value is determined using similar criteria appraisers use with just slight differences.
5. Buyer’s Agent
A buyer’s agent conducts business on behalf of the buyer within the purchasing process of a property. They provide the buyer with potential properties, handle negotiations, and assist with any problems that may arise before, during, and after the property transaction.
6. Cash Reserves
When applying for a mortgage, lenders look to see if the borrower has enough money to maintain monthly mortgage payments, furniture expenses, and other costs; this money is known as cash reserves. It is the money that the buyer has that can cover all necessary expenses that will be incurred after the down payment and closing costs are paid.
When closing occurs, all necessary documents related to the sale are delivered, signed, and completed. The buyer pays the initial down payment as well as all of the other associated costs that derive from the sale.
8. Closing Costs
In addition to the down payment, a buyer will also have to pay closing costs upon the finalizing of the property. Closing costs will typically make up about two to five percent of the purchase price, and will include things such as processing, insurance, and taxation costs.
9. Comparative Market Analysis (CMA)
During the appraisal process, a CMA can be conducted in order to ensure an accurate appraisal of a home using comparable homes in the area as a reference for comparison. Buyers can utilize this in order to counter offer a seller’s listing price.
Contingency is a term that refers to conditions that have to be met for the purchase of a home to be completed.
11. Dual Agency
Dual agency is when one agent represents both the buyer and the seller in the home buying process.
Equity is ownership. In home ownership, equity refers to how much of your home you actually own—meaning how much of the principal you’ve paid off compared to the value of your home. For example, if you have a home with a market value of $200,000, and you still owe $150,000 on it, you have $50,000 in equity. You also have potential to receive more equity if the property value of your home increases.
An Escrow account is a third party account that hold funds for typically two other parties. Usually an account like this is used, when a home buyer purchases a home, the deposit would be put in the escrow account.
14. Fixed-Rate Mortgage
Compared to an adjustable-rate mortgage where the interest rate on the loan can change, a fixed-rate mortgage has an interest rate that never changes over the lifespan of the loan. It is much less volatile, but you do not get to take advantage of declining interest rates if it were to happen.
15. Home Warranty
This warranty protects homeowners from future problems to things such as plumbing and heating, which can be extremely expensive to fix.
16. Home Inspection
Home inspections can be expensive, but can provide much needed security and assurance for any buyer. They ensure that all of the necessary components of the house in question are up to code. It isn’t uncommon for a home inspection to be an aspect of a conditional offer.
We have mentioned interest a few times already, as it is half of what makes up a monthly mortgage payment. It is the component that allows mortgage lenders to make money. Interest is a percentage of a loan that must be paid to the lender as a cost for the buyer borrowing the money.
A listing is a home that a seller has put up for sale. Listings are most commonly found on a local Realtor’s website, social media pages, and any other available publication they can use to market the property.
19. Listing Agent
Listing agents conduct much of the same business as the buyer’s agent but on behalf of the owner of the home being listed. They handle all the negotiations, showings, and advertising of the property.
20. Mortgage Broker
A mortgage broker is a third party individual or company that is responsible for putting together borrowers, with lenders that meet their mortgage criteria and vice versa.
An offer is an initial price (and contingencies, if needed) that a buyer is willing to purchase a listing for. The buying agent provides the offer to the listing agent, and they can accept, reject, or counter the offer.
22. Pre-Approval Letter
In order to receive a pre-approval letter, banks complete a through analysis of a buyer’s financial position prior to providing the buyer with a loan. This allows them to determine the size of the loan that the candidate can afford and pay back. The document outlining the allotted amount approved by the bank for the loan is known as a pre-approval letter.
Principal is the other half of the monthly mortgage payment equation. The principal is the original loan dollar amount provided by the lender. The principal payment does not change, and is calculated by dividing the loan amount by the number of months of the mortgage period. If you were given a 15-year mortgage with a $200,000 loan, the principal monthly payment would be $1,111.11 [200,000/(15×12)].
24. Private Mortgage Insurance
Private mortgage insurance (PMI) is an insurance premium that the buyer pays to the lender in order to protect the lender from a buyer defaulting on a mortgage.
25. Real Estate Agent
A real estate agent is a professional with a real estate license who assists both buyers and sellers in the home-buying process. They work under a brokerage and a broker in order to conduct business and practice their profession. The brokerage is the one who pays the agents their commissions.
26. Real Estate Broker
A real estate agent who has worked long enough, initiated and completed a certain number of real estate transactions, and passed their broker’s license exam, can become a real estate broker. The key benefit to achieving this higher level of real estate education is the ability to work independently and have agents work as their employees.
A Realtor is a real estate agent who is a member of the Canadian Real Estate Association (CREA). Much like any reputable association, the CREA requires members to pay annual fees, uphold a code of ethics, and conduct business at a very high standard. One of the primary benefits is the ability to use REALTOR® on any marketing in order to display a level of quality and professionalism that stands above the rest.
Refinancing is when you replace your old loan with an entirely new loan that has different rates and payment structures. The primary reason homeowners refinance is to take advantage of declining interest rates and reduce their monthly mortgage payments. Be sure to discuss with your broker about any potential financial penalties you might incur before refinancing.
29. Title Insurance
One of the less commonly known costs associated with the purchase of a house or property is title insurance. Title insurance provides protection to the new property owner against some financial losses associated with ownership or title issues.
The home buying process can be a whirlwind of emotions. At Lass Real Estate, we want to provide you with the information and the guidance to ensure you’re prepared for the adventure ahead. Check out our blog for more articles regarding real estate, or contact us for any home buying or selling needs.
Please do not hesitate to contact us at any time if you have questions regarding purchasing a home, selling a home or any real estate venture that you may be considering.
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