There is a lot of confusing terminology used between real estate professionals,whether it’s your first time buying, or you just don’t quite understand something, we have taken the time to explain a basic set of real estate terms that will allow you to be better informed and involved in any real estate transaction.
Amortization – a system of paying off the mortgage that combines interest and principal for your payments, rather than just paying off the interest first. Typically you pay more interest at the beginning, and more principal at the end of a loan term.
Assessed Value – the dollar value assigned to your home by a public tax assessor for the purposes of city/state taxes. This number is typically different from the value assigned by a private home appraisor, and sometimes different from what a home will sell for on the market.
Cash Reserves – The money the buyer has left over after the down payment and all those closing costs.
Closing – the meeting in which the sale of a property is completed. Buyers and sellers sign documents and exchange funds, this is sometimes called a settlement.
Closing Costs – all of the miscellaneous expenses and fees paid by the buyer (and sometimes seller) when a deal closes. Some examples of these expenses include commissions, mortgage fees, recording fees, title insurance, and more.
CMA – this stands for Comparative Market Analysis, sometimes these are also referred to as ‘comps.’ This is a report of similar homes in the area that were recently sold or are currently on the market. This is used to help determine an accurate value for your home.
Contingency – a clause in an agreement that keeps things from being legally binding unless a condition is met. The most common contingencies on a purchase contract are the right to have a home inspection before buying the home or obtain acceptable financing from a lender.
Earnest Money Deposit – usually given with an offer, this is a payment to a seller to show you are serious about buying the property. It is counted toward the downpayment, and refundable if the offer is not accepted.
Equity – the difference between the home’s fair market value, and the unpaid balance of the mortgage. Equity increases over the life of the loan. For example, if your home is worth $100,000, and you owe $50,000 still, the other $50,000 is your equity.
Escrow – an account setup by the lender that receives monthly payments from buyers to pay for things like insurance or taxes.
Home Warranty – similar to any warranty, sellers and buyers can pay a fee to protect the home against future issues, like plumbing or heating.
Interest – the cost the lender charges you for borrowing money. Usually referred to as a rate.
MLS – Multiple Listing Service. An MLS is an organization that collects and distributes home sale information to its members. MLS data is used to populate home listing sites, like this one. Membership is not open to the public, and there is more than one MLS covering the country.
Mortgage Broker – An independent individual (or company) who brings together borrowers and lenders together. Unlike a mortgage banker, a mortgage broker does not fund the loan. Instead, the broker originates and processes the loan, and places it with a funding source, such as a bank.
Principal – The amount of money borrowed to buy your home. If you purchased a $100,000 home with a 10% down payment, your principal is $90,000. That is the amount you need to pay back, plus interest.
Point – A point is equal to 1% of the value of a mortgage loan. Buyers have the option of buying discount points by paying more money up front in exchange for a lower interest rate.
Private Mortgage Insurance (PMI) – PMI is an insurance premium paid by the buyer to the lender to protect the lender if you are unable to pay your mortgage. Once you have 20% equity in the home, this insurance is discontinued. PMI allows people to have access to homes that they don’t yet have a 20% down payment for.
Real Estate Agent – a professional who has earned a real estate license in their state, usually it requires a minimum number of classes and a test, though requirements vary by state. Agents work under the supervision of a broker.
REALTOR: A Realtor is a real estate agent that is a member of the national association of Realtors. This means they uphold the standards and code of ethics of the organization. Not all agents are Realtors.
Real Estate Broker – a Real Estate Agent that has taken education beyond the agent level and passed a state broker’s exam, as well as meet the minimum number of transactions required by their state. Broker’s can be affiliated with an agency, work on their own, or can hire agents to work for them.
Title Insurance – an insurance policy that protects owner or lender interest in the property from unexpected claims of ownership.