There are plenty of daunting aspects of buying a house, particularly if it’s your first time doing so. It’s a very long process, but one of the hardest things is getting to grips with all the different terms that various people will use. If you’ve never bought a house before – or haven’t been around when someone else is buying one – many of the terms will seem foreign to you.
It makes it even harder for you to deal with the buying process as you’re constantly confused or asking people to explain things.
Consequently, you should brush up on as many of the key terms as possible. Below, you’ll find a relatively exhaustive list of terms that are guaranteed to be uttered at some point during the buying process. Other terms do exist, but they’re either obvious to understand or don’t come up that often.
Make yourself comfortable, and let’s go through the list.
Annual Percentage Rate (APR)
This is likely to come up when you are dealing with a mortgage (which will be discussed later in this piece). Effectively, the APR is a yearly interest rate that takes into account all the fees and costs paid to obtain the loan. In essence, the average interest over the loan’s term will be calculated to come up with the APR. In the simplest terms, it’s a percentage that lets you know how much interest you’ll pay each year! This is used so you can actually figure out the cost of your loan over time.
Simply put, this refers to something increasing in value. When buying a home, you will probably hear this term when someone is talking about how much a property is worth. Real estate agents may tell you that the property you’re looking at has appreciated over the last few years, showing that it has increased in value. Or, you may be told that a home has a good chance of appreciating in value, meaning it’s a wise investment choice.
Conversely, you also have depreciation, which is the opposite. It’s when something has gradually decreased in value. So, if someone tells you that a property has seen a lot of depreciation over the last decade or so, it shows that it is slowly becoming worth less and less.
This is one of those terms that property experts throw around all the time without thinking about newbies. To them, it’s a straightforward term that refers to all the extra costs of buying a house. However, to newbies, this doesn’t really explain anything.
Effectively, closing costs refer to things like lender’s fees, taxes, credit check fees, insurance premiums, inspection fees, and so on. It quite literally covers everything that you spend money on when buying your home, apart from the home itself. It’s a good idea to keep track of the closing costs at all times, ensuring that you don’t end up going over budget.
Credit Score & Credit Report
These two terms are often used interchangeably, so they’ve been grouped together for your convenience. While both terms are similar and tackle the same topic, there is a slight difference in what they mean. For example, your credit score is a calculation that shows how creditworthy you are. You are given a number, and this is compared to other people’s credit scores. Generally, a high score is over 700, with a low one below 400.
On the other hand, a credit report is a written history of your financial transactions and everything that you have done involving credit. This includes bill payments, credit card usage, loans, and so on. In essence, your credit report is then used to determine your credit score. Both of these terms will be used when applying for a mortgage as you need a good credit score to get a loan. A bad score shows you aren’t worthy or trusted to borrow such a large amount of money, and you’ll have to work on improving it.
Check out the video below for some simple starting ideas:
At some point in the buying process, you will come across a deed. It may be spoken about in meetings with your real estate agent, and you’ll probably smile and nod. So, what is a deed in real estate? Well, it’s a legal term that’s used to refer to the document you draw up when transferring ownership of a property. It’s a legally binding document that explains who the property used to belong to, and who the new owner will be. This has to be signed by both the previous owner (grantor) and the new one (grantee). That’s basically all you need to know about this, the contents of a deed don’t really matter to you when buying the home.
Earnest Money Deposit (EMD)
Let’s say you have found a house that you really like, and you’re keen to buy it. You submit an offer to the buyer, and they accept it. At this point, you may have to make an EMD. In essence, this is a deposit of sorts that shows you are committed to buying the house. It will form part of the overall payment for the house, but you don’t have to pay the rest until the closing date.
There are a few reasons why an EMD is made by buyers. Firstly, it shows that you’re serious about buying the house. Otherwise, people might register their interest, draw the seller on for a bit, then back out. It’s incredibly frustrating for sellers to deal with this, so it stops people from being idiots!
Secondly, it protects the seller if the buyer doesn’t pay the full amount by the closing date. The seller will keep the EMD as something of a penalty, and the same goes for any breaches of the contract. It’s very much something that benefits the seller not the buyer, but buyers need to be aware of it nonetheless.
Another term you’ll hear a lot and probably have no idea what it means. This one is simple, it refers to when funds or documents are held by a third party. Say you’re about to buy a house, you may keep the funds in escrow until the closing date to keep them safe!
This is when the sale of the house is finally finished and the ownership is officially transferred from one party to another. It’s the end of the process, and it means that all the contract terms have been met, the deed is signed, and you’re good to go.
Now, a mortgage is a large loan that’s used to pay for your house. Most people will need to get one, but there are so many different terms relating to a mortgage that you have to be aware of. Two of the most common are fixed-rate and adjustable-rate.
A fixed-rate mortgage has an interest rate that stays the same. It doesn’t change throughout the lifetime of the loan, making it easy for you to work out how much it will cost you.
An adjustable-rate mortgage is one that fluctuates over time. It can go up or down based on different market indicators. The benefit of this is that you can go years with a very low interest rate on an ARM, much lower than with an FRM.
Real Estate Agent/Broker/Realtor
These three terms are used all the time, and most people think they refer to the same thing. But, there are differences between a real estate agent, a real estate broker, and a Realtor.
A real estate agent is someone with a state license that helps people find and buy/sell homes. They are typically supervised – usually by a real estate broker. Speaking of which, a broker is a step-up from an agent and is licensed to deal with the actual buying or selling of property for a fee.
Then, you have a Realtor. Here, this is simply a real estate agent that is a member of the National Association of Realtors. As a result, they are legally allowed to refer to themselves as a Realtor, but they still do the same job.
If you think back to when we covered the term ‘deed,’ you might be a bit confused as to what title means. This is because many people think that title and deed are the same things – but they aren’t. While the deed is a legal document, the title is merely the word given to describe ownership of the property. Whoever has the title is the owner of that particular property. So, the deed is basically a contract that transfers the title from one person to another.
You will almost certainly come across all of these terms when buying your first house. It’s always useful to do some background research beforehand, learning as much as you possibly can. This way, when you’re thrust into the situation, you can make sense out of what everyone is saying. You won’t be bamboozled by all of these terms, making you feel a lot more confident when making a purchase.