About to buy a home? Feeling totally prepared?! Ha!
During the homebuying process, there are a ton of terms you’ll encounter that could be confusing or even deceiving. Unless you have the time and expertise to promote your property yourself or look for a new one, you will probably turn to a real estate broker for help. But it’s still important to learn the jargon you’ll encounter along the road of homeownership yourself! It can make the mortgage process less intimidating and provide even more clarity on the timeline of your home purchase.
We’ve rounded up some of the most common real estate terms that make prospective home buyers think: WTFinance does this actually mean?! (Trust us, you’re not alone!)
APR: Annual Percentage Rate
Think of this as the actual yearly cost of borrowing money. When buying a home, APR reflects the interest rate, mortgage broker fees, and other charges that you pay to get the a loan. An example of a 10% home APR would be: $1000 borrowed x 10% APR = $100 interest owed. The higher your credit score, the more likely you’ll qualify for a lower APR which means less additional money to worry about owing after the purchase goes through.
ARM: Adjustable Rate Mortgage
If you don’t plan on making your new home your forever home, it might make sense to look at an adjustable rate mortgage (ARM). Although all ARMs have 30-year terms, you’ll commonly see a reference to a 5-, 7-, or 10-year ARM. This timeframe refers to a period at the beginning of the loan term when the interest rate is fixed. During this initial period, you can get a lower rate than you would with a fixed-rate loan over the same 30-year term. This is because bond investors don’t have to try to adjust for inflation 30 years down the line. They have the opportunity to adjust more closely with current market rates once the fixed period is up. So if you’re planning to stay in your home for only a few years, you may be able to pay less interest during that time frame.
An Escrow is a service where a third party holds something of value (like a down payment during the closing of a big purchase) to ensure that the conditions of the contract are met. It is often provided through mortgage lenders that can bundle your mortgage payment, homeowners insurance and property taxes into one monthly payment. While you don’t have to opt in to an escrow account, it could be a more convenient way to divide your homeowners insurance costs and taxes over 12 months so you’re not paying it all at one time.
Fair Market Value
The Fair Market Value of a home is the agreed upon price a buyer is willing to pay a seller on the open market. It is often determined by an appraisal, especially for mortgages or a home equity loan. The best way to determine a property’s fair market value is to compare it to other home prices of a similar square footage, in similar neighborhoods.
HELOC: Home Equity Line of Credit
A HELOC offers a credit limit equal to a portion of the difference between the market value of your home minus the value of your mortgage. Most people use HELOCs to make home renovations.
For example, if you owe $90,000 on your mortgage and the home is appraised at, say, $200,000, you have about $110,000 in equity. A HELOC will usually provide a line of credit up to 90 percent of your home’s equity. How much you receive will depend on the outstanding mortgage, your credit history and other factors.
Even with a HELOC, you may experience a shortage of funds. If that is the case, you can reduce your renovation budget or break up the project into a couple of phases to give yourself more time to save and finish the project with cash.
HOA Fee: Homeowners Association Fee
Whether you’re looking to buy a house, condo, or apartment, be advised that many places and neighborhoods have a corresponding homeowner’s association that is responsible for maintenance of common areas and enforcement of HOA policies and restrictions. Having a communal swimming pool is awesome, but beware: HOA fees can rise when the HOA budget runs dry or when major repair work is needed, and can also make a property more difficult to sell in a slow real estate market.
Before signing on the dotted line, remember to estimate your total property expenses which typically includes insurance, HOA fees, property taxes, utilities and maintenance costs.
Sounds easy right? Don’t worry, ‘what does a mortgage really mean’ is not a dumb question!
As defined by Zillow, “A mortgage is a loan that a bank or mortgage lender gives you to help finance the purchase of a house. It is most advantageous to borrow approximately 80% of the value of the house or less. The house you buy acts as collateral in exchange for the money you are borrowing to finance the mortgage for a house. A mortgage payment is composed of four parts: principal, interest, taxes and insurance. It is normally paid on a monthly basis.”
Fortunately, those who can only afford a small down payment have a number of mortgage options to make up the difference when purchasing a home. Here are some of the most common: Fannie Mae and Freddie Mac-backed mortgages can require as little as 3% down, and there are few barriers to getting one. At least one of the buyers must be a first-time homeowner, it must be a single-family home, the buyer must live there full-time and the mortgage has to have a fixed interest rate.
You can ask your lender about applying for a Fannie Mae or Freddie Mac-approved mortgage.
Property tax is determined by the assessed value of your piece of real estate and the current rate in your location. They are used as a source of revenue for local government including public services such as firemen, police, and school funding. You can check a property’s municipality’s current tax rate by going online to your local government’s tax/revenue department’s site.
Now that you’re fully versed in real estate lingo, feel confident to tackle all of the ropes of the home buying process. Don’t feel intimidated – you got this!