Knowledge is Power

Walk into your home buying or selling experience with confidence.

by MIKE HALL, Owner/Agent/Broker

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When looking to buy or sell your home, you’ll be met with a lots of terms. Walk in prepared with knowledge on your side. Let’s look at some common terms related to the finance side of real estate.

Adjustable-rate mortgage (ARM) or variable-rate mortgage – mortgage loan with an interest rate that can fluctuate with market changes over the life of the loan.

Alienation clause – clause in the loan that requires the borrower to pay the balance of the loan in a single payment if the property is sold or transferred.

Amortization – spreading out a loan into a series of fixed payments.

Appraisal – value of the property as determined by an appraiser.

Appraisal gap coverage – difference between the purchase price and appraised value.

Assessed value – value that a taxing agency uses to determine property tax rate.

Balloon payment – loan payment that is at least double of previous payments.

Capitalization rate (cap rate) – shows the potential rate of return on real estate investment calculated by dividing the net operating income by the current market value.

Closing costs – fees due at closing including application fees, inspection fees, homeowner’s insurance, property taxes, and agent commissions.

Commission – payment to the buyer and/or seller agent for services provided.

Debt-to-income ratio – all monthly debt payments divided by gross monthly income.

Depreciation – decline in the value of property.

Down payment – portion of the total cost of the home paid upfront.

Earnest money deposit (EMD) – money buyer puts down to show they are serious about purchasing.

Equity – difference between the value of the property and how much is owed.

Federal Housing Administration (FHA) loan – mortgage loan insured by the Federal Housing Administration (FHA) typically for low-to-moderate income borrowers.

Fixed-rate mortgage – mortgage loan with a fixed interest over the life of the loan.

Fair market value (FMV) – price the buyer is willing to pay, and the seller is willing to accept for a property.

Graduated payment mortgage – loan in which monthly payments are small in the beginning and gradually increase over the life of the loan.

Guarantor – person who agrees to pay the mortgage lender the unpaid balance in case of default by the borrower.

Home equity line of credit (HELOC) – line of credit using the equity in the property.  

Interest (or interest rate) – percent of your mortgage payment paid to the lender.

Loan – amount a buyer can borrow to purchase a property.

Mortgage – loan agreement that pays off the cost of a purchased property.

Mortgage insurance – insurance policy that kicks in if borrower can’t make payments.

Origination fee – administrative fee charged by the lender to prepare loan documents, run credit checks, inspect and appraise property.

Points – one-time fee or charge to a lender to secure a loan, usually a percentage of the face amount of the mortgage.

Pre-approval letter (or pre-qualification letter) – document from a lender that expresses willingness to approve borrower for a loan up to a certain amount.

Pre-qualified – homebuyer status that indicates they have qualified for a loan.

Private mortgage insurance (PMI) – insurance intended to protect lender if borrower cannot make payments.

Proof of funds (POF) – document demonstrating that buyer has funds available.

Property tax – tax based on the value of property.

Refinancing – process to secure new mortgage loan for the remaining amount of the current loan.

Reverse mortgage – borrower receives monthly payments in return for the equity of their property.

Second mortgage – second loan on a property that already has a mortgage.

Tax lien – lien on the property on which property taxes are overdue.

Total interest percentage (TIP) – total amount of interest that will be paid over the life of the loan as a percentage of the loan principal.

VA loan – mortgage loan option for veterans of U.S. Armed Forces.

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