Buying a home can be a daunting and complex process, but it doesn’t have to be. With the right Realtor, you can feel confident that you are being well represented and that she has your back. It can also help to understand real estate lingo. Here is part one of a Freddie Mac real estate glossary you can use to educate yourself on the home buying process.
Amortization: Paying off a loan over the period of time and at the interest rate specified in a loan document. The amortization of a loan includes the payment of interest and a part of the amount borrowed in each mortgage payment.
Amortization Schedule: Provided by mortgage lenders, the schedule shows how over the term of your mortgage the principal portion of the mortgage payment increases and the interest portion of the mortgage payment decreases.
Annual Percentage Rate (APR): How much a loan costs annually. The APR includes the interest rate, points, broker fees and certain other credit charges a borrower is required to pay.
Application Fee: The fee that a mortgage lender charges to apply for a mortgage to cover processing costs.
Appraisal: A professional analysis used to estimate the value of the property. This includes examples of sales of similar properties.
Appreciation: An increase in the market value of a home due to changing market conditions and/or home improvements. [Because we are in a seller’s market, homes are appreciating faster than they would in a normal market. See our May 30, 2017 post for more info.]
Capacity: Your ability to make your mortgage payments on time. This depends on your income and income stability (job history and security), your assets and savings, and the amount of your income each month that is left over after you’ve paid for your housing costs, debts and other obligations.
Closing Costs: The costs to complete the real estate transaction. These costs are in addition to the price of the home and are paid at closing. They include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs. Ask your lender for a complete list of closing cost items.
Commitment Letter: A letter from your lender stating the amount of the mortgage, the number of years to repay the mortgage (the term), the interest rate, the loan origination fee, the annual percentage rate and the monthly charges.
Contingency: A plan for something that may occur but is not likely. For example, your offer may be contingent on the home passing a home inspection. It the home does not pass inspection, you’re protected.
Counter-offer: An offer made in response to a previous offer. For example, after the buyer presents their first offer, the seller may make a counter-offer with a slightly higher sale price.
Debt-to-Income Ratio: The percentage of gross monthly income that goes toward paying for your monthly housing expense, alimony, child support, car payments and other installment debts, and payments on revolving or open-ended accounts such as credit cards.
Depreciation: A decline in the value of a house due to changing market conditions or lack of upkeep on a home.
Earnest Money Deposit: The deposit to show that you’re committed to buying the home. The deposit will not be refunded to you after the seller accepts your offer, unless one of the sales contract contingencies is not fulfilled.
Equity: The value in your home above the total amount of the liens against your home. If you owe $100,000 on your house but it is worth $130,000, you have $30,000 of equity.
Home Inspection: A professional inspection of a home to determine the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation and pest infestation.
Index: The published index of interest rates used to calculate the interest rate for an ARM. The index is usually an average of the interest rates on a particular type of security such as the LIBOR.
Liabilities: Your debts and other financial obligations.
Loan modification: This is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your note to make the payments more affordable.
Loan Origination Fees: Fees paid to your mortgage lender for processing the mortgage application. This fee is usually in the form of points. One point equals 1% of the mortgage amount.
Lock-In Rate: A written agreement guaranteeing a specific mortgage interest rate for a certain amount of time.