If you’re shopping for a home or selling a home, it’s easy to start drowning in all the real estate and bank terms you’ll hear — even from your Realtor or lender, who are there to help steer you through the straits in the process.
But don’t blame those folks. It’s not their fault. Real estate is complicated.
For instance, the bottom-line payment on a monthly mortgage statement — the big number in bold type — is much more than just a portion of the purchase price of your house. So, buckle up: It reflects a portion of principal plus the interest that the lender earns for loaning you cash, but also typically an escrow amount to cover taxes and mortgage insurance, title insurance and homeowners insurance. And eventually, you may have enough equity in your home that you can take out a HELOC, to pay for other things you need.
Whew! Speaking of things you may need, how about a guide to what all of those words actually mean? Here’s a quick-hit look at the 14 most important terms for home buyers or home sellers.
Don’t worry, we’ll start with the easy ones.
Assessed value: This isn’t the price of your home. Rather, it’s what the city or county assessor decides the home is worth for purposes of annual taxes. Your house may be re-assessed from time to time, and it’s not uncommon for this value to be lower than what a private appraiser might decide your place is worth. What the market would actually bring for the house is likely different as well.
Closing: Also called the settlement or just The Big Day. This is when the buyer and seller meet, with attorneys, to exchange money and sign the papers to enact the actual sale. Limber up your writing hand.
Closing costs: Remember when you bought your last car, and the price was several thousand dollars higher at closing, thanks to taxes, fees for tag and title, ad nauseum? Closing costs are similar, covering legal and recording fees, title insurance and commissions. The buyer or seller may pay closing costs — this is negotiated between the two — or they may split them.
Earnest Money: This is a good-faith deposit the buyer gives the seller to prove they are serious about purchasing the home. If a sale moves forward, the money counts toward the closing. If the seller rejects the offer, he refunds the earnest money. If the buyer can’t complete the sale, it is usually forfeited.
Equity: This is the difference between what you owe on the house and what the house is worth. If your house is worth $300,000, for instance, and you owe just $100,000 on it, you have $200,000 in equity. Equity increases as you pay down the mortgage — assuming neighborhood values are stable — or the value of the home rises.
Interest: Your lender is on the hook for that $300,000 mortgage. For taking that leap of faith, the lender charges you a fee, or interest rate, on the balance you still owe them.
Principal: This is the loan amount you still owe the bank or lender. It does not include the interest you owe. At the time of purchase, the principal is the purchase price of the house minus the down payment.
Comparative Market Analysis: Usually just called a “CMA” or a “comp,” this report looks at the sales prices of similar homes in the area – ideally with the same number of bedrooms and bathrooms, about the same age, and in comparable condition — to set an accurate value for yours. Investopedia offers a good, detailed explanation.
Escrow: The lending bank estimates annual fees like taxes and insurance, divides those costs by 12 and adds it to your monthly payment. Escrow payments are typically re-evaluated annually.
Multiple Listing Service: Or just MLS. These are groups that cull home sales details and offer them to to members. It’s how real estate agents know what properties are on the market, and it’s a powerful tool for them as they sell houses.
Title Insurance: This is insurance that both the homeowner and lender want. It protects them both in the event that the title is not “clean,” such as if an unexpected third party later claims to own the house.
Amortization: Typically, your early loan payments are primarily going toward interest you owe the lender while you slowly chip away at the principal. As the principal shrinks over time, you’ll pay more toward that principal and less to interest. Amortization is a term describing this combination payment. (If you’ve ever heard anyone complain about making home payments for 5 years and still owing the full purchase price, that’s because it wasn’t amortized.)
Point: By definition, a point is simply a percentage point — 1 percent of the value of a loan. Where it gets confusing is when lenders give the option of paying points up front to garner a lower interest rate. For details on making this decision, check out this article by SmartAsset.
Private Mortgage Insurance: Remember when we said the lender is taking a leap of faith by loaning you all that money? Well, PMI is insurance you pay the lender to protect them in the event you can’t pay the mortgage. You can avoid paying for PMI if you can make a 20-percent down payment at closing.
HELOC: Need to renovate that kitchen down the road? Is the sweltering summer calling out for a backyard swimming pool? Once you have enough equity in your home, you can borrow against that equity with a home equity line of credit, or HELOC (pronounced “HEE-lock”). You will have to get an updated appraisal and incur some small costs, but you’ll end up with, essentially, a second mortgage that you can draw on for whatever expenses you like.
Carter & Associates is here to help you navigate all aspects of buying, selling, and building – including understanding these and many other terms used in the process. Contact us today for a no-obligation, friendly chat about your real estate needs. And yes, we respond to text messages! We look forward to getting to know you!