Buying a house can be scary, complicated, exhilarating and exciting — all at the same time. And that’s true even if you have previous experience purchasing real estate.
‘Legalese’ or just basic terminology with any property purchase can be confusing. Here are a few of the savvy vocabulary words that are part of the process that may help demystify the language:
Acceptance — The buyer and the seller agree to enter into the contract and are bound by the terms of the offer.
Adjustable-Rate Mortgage (ARM) — The interest rate of the mortgage changes, according to the corresponding fluctuations in the index. (All ARMs are tied to indexes.)
Appraised Value — The monetary figure of a property’s estimated value, determined by an appraiser’s experience, knowledge and analysis of the property and comparable properties in the area
Assessed Value — This is the value for determining property taxes, determined by a public tax assessor.
Call Option — The loan can have a provision giving the lender the right to accelerate the debt, which requires an immediate full payment of the loan for a specified reason, or at the end of a given period of time.
Cash Available For Closing — Funds of the borrower available for down payment and closing costs. May not include cash reserves (monies required to have at closing or if down payment is to be from a different party if so required by lending party).
Closing — This has different meanings in different states. Some states recognize a transaction as “closed” only after the documents are recorded at the local recorders office. Other states recognize it as a meeting where all of the documents are signed and money changes hands.
Closing Costs — Costs are separated into two categories: “non-recurring closing costs” and “pre-paid items.” Non-recurring closing costs are the one-time items paid as a result of buying the property or obtaining a loan. “Pre-paids” are the items such as property taxes and homeowners insurance, amounts that recur over time. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate, which is to be issued to the borrower within three days of receiving a home loan application.
Deed-In-Lieu — The deed the borrower gives to the lender to satisfy a debt to avoid foreclosure. (“voluntary conveyance”)
Deed of Trust — Some states, like California, do not record mortgages. Instead, they record a deed of trust, which is essentially the same thing.
Escrow — A third party holds monies or items of value, which will be delivered until delivered to the seller when the transaction is closed.
Fee Simple — The greatest possible interest a person can have in real estate.
Index — This is the number used to calculate the interest for the ARM. It is usually a published number (or %), such as the average interest rate on Treasury Bills. Then a margin is added to the index to compute the interest rate for the ARM. (Some lenders do cap how high or low interest rate can move.)
Margin — The difference between the interest rate and the index on an adjustable rate mortgage. The margin remains stable over the life of the loan. (The index moves up and down.)
Negative Amortization — If the monthly payment does not cover all of the interest that would normally be due at the current interest rate, the amount that is “short” is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.
Purchase Agreement — The buyer and seller have a signed written contract, which states the terms and conditions under which a property will be sold.
Two-Step Mortgage — An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven years of the term and a different interest rate for the remainder of the amortization term.
There are so many other terms not listed here … And the Internet is a wonderful place to be sure you understand all the lingo swirling around as the deal comes to a close. Be sure to consult a reputable Realtor and happy house hunting.