A Few Real Estate Terms You May Not Be Familiar With

I have been asked a few questions lately about what some real estate terms mean. Although this is nowhere near a complete list, I hope the information below helps you understand some of the more-common terms – especially important if you are considering a move anytime soon.

ADJUSTABLE RATE MORTGAGE (ARM) – A mortgage in which the interest rate is adjusted periodically based on a pre-selected index and on an adjustment interval (the time between changes in the interest rate and/or monthly payment is typically 3-7 years, although some lenders may have shorter or longer intervals between loan origination and readjustment).

APPRAISAL – An estimate of the value of property, made by a qualified professional that the lender appoints called an appraiser.

DOWN PAYMENT – The money paid by the buyer to make up the difference between the purchase price and the mortgage amount. Down payments usually are 10-20% of the sales price on conventional loans, although some programs offer a zero or very low down payment based on qualification parameters.

EARNEST MONEY – Money provided by the buyer and held in escrow as part of the purchase price to bind a transaction and guarantee performance by the buyer.

ESCROW – Escrow refers to a neutral third party who carries out the contractual instructions, handles all the transactional paperwork, and makes sure each party does what it is contractually obligated to do. Escrow also coordinates all the closing paperwork, makes final distributions, and finalizes the transfer of title at the municipal level.

FIXED-RATE MORTGAGE – A mortgage on which the interest rate is set for the term of the loan and the principal and interest payments are constant throughout the term.

HAZARD INSURANCE (AKA Homeowner Insurance) – a form of insurance in which the insurance company protects the insured from specified losses, such as fire, wind, and other limited types of damage.

JUMBO LOAN (AKA Non-conforming loan) – A loan which is larger than the limits set by the government’s Freddie Mac and Fannie Mae. In 2018 in most areas, the limit is $453,100. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate and have stricter underwriting rules.

POINTS – Points are prepaid interest or charges assessed at closing by the lender (but disclosed by the lender up front) to limit their risk. Each point is equal to 1% of the loan amount.

PRIVATE MORTGAGE INSURANCE (PMI) – In the event that a buyer is putting down less than 20% (which means they will have less than 20% equity in the property) lenders may allow this smaller down payment. However, when the borrower has less than 20% equity, they need to carry private mortgage insurance requiring an initial premium payment of 1.0-5.0% percent of the mortgage amount and may require an additional monthly fee depending on the loan’s structure. In many cases, PMI can be removed and the payments restructured once the homeowner does 20% equity.

SERVICING – Refers to the different processes that a lender performs to keep a loan in good standing, such as mortgage payment, payment of property taxes and insurance, and annual reporting.

TITLE– An official document that gives evidence of a person’s ownership of a property.

TITLE INSURANCE – A policy, usually issued by a title insurance company, which insures a homebuyer and lender against errors in the title search.

TITLE SEARCH – A process in which official records are reviewed to affirm legal ownership of property. Usually done by a title company.

UNDERWRlTING – The process performed by a mortgage company to determine whether a potential buyer and property is a good investment, balancing risk and profitability. This decision is based on credit, employment, assets, as well as the soundness of the property itself.

Have a real estate term that you aren’t sure about? Please ask me!