If you find yourself scratching your head when you try to make your way through a standard real estate document, you’re not alone. The bewildering array of real estate terms is enough to give anyone a headache. Here is a glossary of real estate terms to help you make sense of it all:
Adjustable-rate mortgage: With an adjustable-rate mortgage the interest rate can change at set intervals during the life of the loan, usually at five, seven or ten-year intervals. Later in the life of the loan, adjustable rates can leave you facing a much higher interest rate than you’d like, so they can be risky for people who plan to stay in their homes for many years.
Amortization: Amortization combines both principal and interest in your loan payments. This way, you can start building equity in your home right away, rather than making interest-only payments at the start.
Appraisal: Before handing over the money to purchase a home, lenders want to make sure the property is worth what you’ve offered to buy it for. This valuation is called an appraisal. The lender’s agent will do an on-site examination of the property and compare it with nearby properties to make sure you’re not overpaying.
Assessed value: Unlike the appraised value, which can fluctuate greatly depending on market conditions, the assessed value is assigned by a public tax assessor. This valuation is used to determine how much you’ll owe in property taxes.
Closing: When an offer on a property is accepted, a closing date will be set to finalize the sale. The closing is simply the meeting where you will finalize the purchase of your home. This will occur far enough in the future, typically 30-60 days, to allow for an appraisal, inspection, and any other activities that need to happen before closing.
Closing Costs: Closing costs refer to all costs associated with the closing, excluding the down payment. Don’t let these catch you by surprise! They include insurance, taxes, loan and fees associated with closing on the property. Generally, closing costs are about 2-6% of the purchase price.
Contingencies: Contingencies are conditions that need to be met for the sale to happen. For example, an offer might include a contingency requiring that the buyer must first have a contract on their house before they can buy yours.
Fixed-rate mortgage: Fixed-rate mortgages are straightforward; the interest rate will stay the same for the duration of the loan.
Inspection: After an offer has been accepted, the prospective buyer has the option to inspect the property. The inspection is meant to assess the physical integrity of the building and should be performed by a licensed professional. Paying for the inspection is the responsibility of the purchaser but should not be overlooked. Serious issues could be discovered that could result in major costs down the road. Issues discovered can be negotiated into the final purchase price.
Interest: The two main parts of a mortgage payment are the principal and interest payments. Interest is the amount you pay each month to the financial institution that holds your mortgage. It is expressed as a percentage of the principal (3.5%, 4.0%, 4.5%, etc).
Pre-approval: Prospective buyers can get a pre-approval letter from a mortgage lender. The letter will outline the amount of money the bank will lend them and is based on a number of factors like income, existing debt, and credit history. The letter helps buyers determine their target price range and helps speed the process when they’re ready to make an offer.
Principal: Principal is the amount of money you borrow to buy a home.
Private Mortgage Insurance (PMI): PMI is an insurance policy that protects the bank in case the buyer defaults on the mortgage. It’s required when buyers are borrowing more than 80% of the property’s value. Payment is included with the monthly mortgage payment and can typically be removed once the buyer builds up 20% equity in the home.
Real estate agent: A real estate agent has earned a license and can assist buyers and sellers with the home-buying process.
REALTOR®: All REALTORS® are real estate agents, but not all real estate agents are REALTORS®. The distinction is important. A REALTOR® is a member of the Canadian Real Estate Association CREA and has agreed to abide by a strict code of ethics. Buyers and sellers can be assured they are receiving fair representation when they work with a REALTOR®. Earl Taylor is a REALTOR®.
Refinancing: Refinancing is replacing an existing loan with a new one. Usually, people do this to lock in a lower interest rate. It’s also a good way to switch from an adjustable-rate mortgage to one with a fixed rate.