Real Estate

A Glossary for Beginner Buyers: Real Estate Terms Every Aspiring Homeowner Should Know

published Feb 3, 2017
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(Image credit: Anna Spaller)

Looking to buy your first home? Struggling to make sense of an avalanche of new terminology? You’re not alone. Taking your first foray into the world of real estate can feel like being dropped unceremoniously into a foreign country. You’re disoriented, bewildered and you don’t speak the language. If that weren’t enough, it can feel like everyone around you expects you to be fluent from minute one.

Before you visit your first listing—or even pick a real estate agent—make a start towards real estate fluency by learning these 16 terms:

1. Adjustable Rate Mortgage (ARM)

Just like it sounds: Interest rates on ARMs fluctuate during the life of the loan, based on certain market indicators. Loans usually have a limit on how much and how often the interest rate can change.

2. Annual Percentage Rate (APR)

This gives you the actual cost of your loan. An APR will be higher than your interest rate because it also accounts for other fees and costs associated with your loan. Understanding APR can help you compare mortgage loans to determine which is best for you.

3. Appraisal

A licensed appraiser will evaluate and determine the value of a property. Usually involves comparisons to recent sales of similar properties and is used by lenders to determine the limit of what they will lend for that property. Differences between appraisal value and loan amount can cause deals to fall through (meaning: the bank won’t lend you more than the appraisal says the house is worth).

4. Closing Costs

Closing costs encompass the myriad of fees and taxes paid in cash (i.e. not financed into a loan) at settlement or closing. Some of these costs are recurring, such as property taxes or homeowner’s insurance, others are non-recurring, like appraisal fees or title insurance.

5. Contingencies

Contingencies are the portion of contracts that protect either the buyer or seller. Contingencies release the protected party from liability if the certain terms are not met. For example, an inspection contingency means the buyer can negotiate repairs or even back out of the deal on the condition of an unfavorable home inspection.

6. Due Diligence

Buyers: you should do your “due diligence” on a property after entering an agreement with the seller but before the purchase occurs. Due diligence measures like inspecting the home, researching its history or learning more about the neighborhood help you avoid settling on the wrong house.

7. Earnest Money Deposit

Also called a “Good Faith Deposit.” You pay this when giving your offer as a sign of good faith regarding your intent to purchase.

8. Escrow

Whether or not you’re required to have an escrow account or how long you’re required to have one will vary depending on your loan and lender. An escrow account allows the mortgage holder to collect not only your interest and principal payments each month, but also 1/12 of the estimated total of your taxes and insurance for the year. You might also pay an advance on your taxes and insurance—say, 6 months’ worth—into an escrow account at closing. When the bills are due, the lending bank uses the money in your escrow account to pay your tax and insurance bills on your behalf.

9. Fixed Rate Mortgage

A loan with a fixed interest rate across the life of the loan (15 to 30 years). Determining whether an ARM for FRM is right for you depends on a variety of factors.

10. Multiple Listing Service (MLS)

Computer service used by real estate agents to view property details for homes on the market.

11. Pre-Approved

Some argue that there is no distinction between pre-approval and pre-qualification for a loan. Others strongly disagree. Generally, a pre-approval is more in-depth than a pre-qualification: Pre-approval follows a credit check and thorough verification of your finances. A pre-approval letter states that, barring appraisal issues or other problems, you are approved for a loan. It’s important to note that this is not a guarantee of a loan.

12. Pre-Qualified

Like pre-approval, a pre-qualification does not guarantee that you will get the loan. It tends to hold less weight than a pre-approval, but will give you a good idea of the maximum loan amount you could secure.

13. Prepayment Penalty

These aren’t as common as they used to be, but it’s still important to check whether your loan comes with a prepayment penalty or not. To pay down your loan quicker and avoid paying as much interest, you can make additional payments towards the principal of your loan. Because banks want you to pay ALL the interest, some slap homeowners with a penalty charge for paying off the balance early.

14. Principal

Your mortgage principal is the amount you actually borrowed to buy the home. You pay interest in addition to this principal.

15. Private Mortgage Insurance (PMI)

Usually only required if your down payment is less than 20%. Meant to protect your lender in the event you default on your loan. The cost of your PMI varies based on multiple factors, but is typically between 0.5% and 1% of the entire loan amount, annually. So you could pay roughly $40-$90 per month for every $100,000 you borrow. You can ask your lender to cancel your PMI once you’ve built equity of 20% in your home, meaning the amount you owe on your mortgage is less than 80% of what the home is worth (a new appraisal, refinancing or remodeling can help convince the bank to cancel your PMI sooner).

16. Zoning

If you’re interested in running a home business, adding rental space or making other significant changes, you need to make sure local laws and ordinances will allow for those changes or activities. Investigate zoning laws as part of your due diligence checklist.

Of course there are dozens of other real estate terms you will encounter during the home buying process. That’s why it’s important to find a real estate agent you can trust to help guide you through the process: Learning the above terms will help you feel more confident when you begin your search, but you’ll need a trustworthy, competent agent to help explain everything and navigate the legal and financial intricacies of buying your first place.