There’s a reason why two-thirds of homebuyers and sellers use a certified real estate agent to facilitate the process. The housing market can be complex and confusing, to say the least! An agent understands market values, negotiations, home appraisals, real estate legalities, and much more. They take a lot of the grunt work out of the process.
But just because you use a certified real estate to help manage your home sale or purchase doesn’t mean that you shouldn’t know the lingo. Understanding certain terms and concepts will make you a better communicator. Therefore, you can better do what’s best for your property.
Whether you’re buying, selling, or investing, here are some real estate terms you should know.
Annual Percentage Rate (APR)
Annual percentage rate, more commonly referred to as APR, represents your mortgage interest rate for each year. It included upfront fees, like the loan origination fee, and is a percentage of interest you’ll pay on your mortgage each year based on things like your income and your credit report. So, if your APR is four percent, you’ll pay four percent interest on the remaining balance of your home over the span of a year.
Obviously, lower APRs are better. Use this number to compare offers from different home lenders.
Closing is the term used to describe the official transfer of goods between the seller and the buyer.
You’ll also hear the term “closing costs.” This refers to the extra fees you’ll pay on top of the final asking price. It includes:
- Appraisal fees
- Credit check fees
- Loan origination fees
- Escrow fees
- Title insurance
- Other fees designated prior to closing
All costs should be designated on paper prior to closing. You will pay half of the closing costs and the buyer or seller (depending on your role) will pay the other half.
If you’re dealing with a buyer who wants to lock in a deal, they might pay earnest money. It’s like a monetary promise that you’ll carry out the deal. The remainder will be paid at closing when your loan from the bank comes through.
Multiple Listing Service (MLS)
A good real estate agent will utilize a massive database, known as MLS, that shows home listings across multiple platforms. This resource is available only to licensed realtors who pay for the membership, and it gives agents a much broader array of homes.
You want a realtor who uses MLS. It significantly widens your options and raises the likelihood of finding a home or selling one.
Private Mortgage Insurance (PMI)
The standard down payment for obtaining a home loan is 20 percent. However, many homebuyers aren’t able to raise that amount, flagging them as a potential risk for the lender. They’re required to get private mortgage insurance, which protects the lender in the case that the buyer defaults on their payment.
It obviously raises your mortgage payments, but once you’ve paid off 80 percent of your home, you’ll no longer be required to pay the PMI premiums.
Fixed Rats vs. Adjustable Rate Mortgages
When applying for a convention loan, you’ll have the choice between a fixed rate and adjustable rate mortgage. The fixed rate mortgage will maintain a predetermined interest rate for the entire life of the loan. This means if market rates go up, your rate won’t change, but it also won’t go down if rates decrease.
The adjustable rate mortgage has a varied interest rate that depends on the economy. When rates rise, you’ll pay more on your mortgage, and when they’re down, you’ll pay less. This can make smart financial sense if you plan to sell or refinance within five years of purchasing it.
Most people choose a fixed rate mortgage because it’s more predictable, and you’re likely to pay less if you keep your house for longer than five years.
Loan officers require an appraisal. A certified appraiser will walk through the property and determine the approximate value, looking at the shape of the house and comparing it to other homes that have sold in the same neighborhood. To protect their interests, loan officers won’t honor an asking price that’s beyond the appraiser’s valuation.
Buyers can also order an inspection, which, contrary to popular belief, is different than the appraisal. The inspector will scour the house for signs of damage in areas like foundation, heating, plumbing, appliances, and electrical. If the damage is significant, the findings can be used to negotiate a lower asking price.
Offers and Contracts
When a buyer finds a home they want to purchase, they’ll make an offer. The seller can accept it or make a counter offer. This goes on until negotiations end and the seller accepts an offer. At this point, a contract will be signed to lock the deal in place.
After signing the contract, buyers are presented with a home title report within a week. As protection for both you and the bank, most lenders require that buyers purchase title insurance.
Title insurance agents make sure the seller is the legal owner of the property and that they have rights to sell it. They’ll specifically look for liens on the home that would make transfers difficult.
Knowing how much home you can afford is the first step in any home purchasing process. Buyers need a pre-approval letter from their financial institution that states how much they’ll lend you based on your income and down payment. Typically, lenders will not offer a mortgage with payments higher than one-third of your monthly income.
Many home sellers will not show a home to buyers unless they have a pre-approval letter that states they can afford to make an offer.
Buyer’s Agent vs. Listing Agent
There are usually two agents who facilitate the home selling and buying process. As the name suggests, the buyer’s agent works with the buyer. The listing agent represents the seller. In some cases, there may be a dual agency, which occurs when a single agent represents both parties.
You’ll typically pay three percent of the purchasing price to each agent, or six percent to the dual agent. You can often save by using a flat-rate realty company instead.
Principle, Interest, Taxes, Insurance (PITI)
Pronounced “pity,” financial institutions often use this acronym to describe the components of your monthly mortgage payments. It helps you remember the breakdown of costs so you know exactly what you’re paying and why.
Because a home purchase is so large, there’s usually a third party beyond the buyer/seller and agents to handle the money called an escrow officer or agent. They’ll hold the money in escrow while all the paperwork is signed and the legal transfers are made. After this period has closed, usually 30 days, the funds will be released, that the buyer will be free to move into their new home.
The term equity is used in many investments to denote what you actually own vs. what the bank owns. With a home, your equity is the portion you’ve already paid for. So, if you purchase a home with a 20 percent down payment, you have 20 percent equity in the home and the bank has 80 percent. You can calculate the dollar amount as such.
In this case, you have negative equity. When you’ve paid 51 percent of the home, and the bank owns 49 percent, you’ll have positive equity, meaning you get more say in what you can do with the home without running it by the bank first.
These are the major terms you’ll run into when purchasing or selling a home. Knowing these will put more power in your hands as you work through negotiations.
Contact Green Residential for Home Sales Today!
The realty team at Green Residential is ready and waiting to help you sell your home for the best deal possible. We offer a flat-rate fee rather than requesting a percentage of your home sale, which means you can save money in the end. For more information about what our team can do for you, contact us today!