Skip To Content

10 Real Estate Terms All Home Buyers and Home Sellers Should Know

Real estate has its own set of jargon and lingo that may be confusing to some people, especially first-time homebuyers. Even if you are a seasoned homebuyer, it always helps to take a quick refresher course on real estate frequently asked questions. Here is a list of terms that our team of real estate agents get asked all the time. The more you know when you start your real estate journey, the better prepared you will be when you encounter these terms.

Real estate agents vs REALTORS®

This is a very common question since these terms are used interchangeably. It’s easy to compare it to this geometry adage: All squares are rectangles; not all rectangles are squares.

REALTORS® are real estate agents, but not all real estate agents are a REALTOR®. To be a real estate agent in any given state, you must be licensed to sell real estate in that state. A REALTOR® is a licensed real estate agent that is a member of the National Association of REALTORs® (NAR). As a member of the NAR, an agent must abide by the REALTOR® Code of Ethics when conducting business.

This code of ethics drives the agent’s operation, putting the client’s interests in front of the agents, creating more transparency and a better client experience. There are plenty of experienced, ethical real estate agents that are not part of the NAR, but using a REALTOR® is an extra layer of assurance for the buyer and the seller.

What is title insurance?

Like all insurance, it’s better to have it and not need it, than to need it and not have it. Title insurance is a way to protect the owner of the property from financial loss related to ownership of the property. Title insurance will come up near the end of the home buying process. A title research company will check the history of the property to search for liens, legal cases, or other problems with the property before it is signed over to the buyer as a “clean title”. Title insurance is required by the lender. It is a one-time fee that is paid at closing and not part of the mortgage payment.

It is not required for the buyer to purchase title insurance, but it is common practice in case there is a problem. An unknown heir to the property, pending litigation, or oversight by the title company could arise years after the property is purchased. Having title insurance will save the new owners thousands in legal fess if this happens.

What are contingencies in real estate?

Real estate contingencies are conditions that must be met by either the buyer or the seller in order for the sale to move forward. These protect both parties in case there is a problem. Common examples are:

  • Mortgage/financing contingency
  • Inspection contingency
  • Appraisal contingency
  • Home sale contingency

For a more detailed breakdown of what all of these contingencies entail, read our blog post about contingencies.

Fixed-rate vs adjustable-rate mortgages

Mortgages are the easiest way for most home buyers to afford a home. There are two types of mortgages to consider.

  • Fixed-rate mortgages have an interest rate that stays the same for the life of the loan. Interest rates are lower for 15-year loans than for 30-years, but the rate you have when you buy the house will never change. This is the more common option for buyers who plan to live in the home for long periods of time, with the intent to pay off the mortgage. As a result of the rock-bottom rates due to the coronavirus pandemic, buyers are locking in rates at an almost-unheard-of 2.6%-2.7%.
  • Adjustable-rate mortgages have interest rates that fluctuate over time. For the first few years of the loan, the buyers will be locked into the rate at the time of purchase (usually, 5, 7 or 10 years). After that fixed rate period, the interest amount will fluctuate as the market changes.

To find out which one works best for your goals and financial situation, speak to your mortgage lender.

What is debt-to-income ratio?

Lenders use debt-to-income ratio (DTI) as a way to measure how much a buyer an afford to pay for a mortgage every month. Generally, this gives buyers a price range that they can reasonably be able to afford.

DTI is calculated by adding the monthly mortgage payment to any monthly debt obligations (i.e. student loans, car payments, credit cards, etc.) and dividing it by the buyer’s monthly income. Lenders have a rule of thumb that buyers should spend between 28% and 36% of their monthly take-home income on housing to avoid falling into financial trouble.

What is earnest money?

Earnest money is a deposit that they buyer offers as a sign of how serious their offer is. This amount is often 1%-3% of the offer price, but can be more. Earnest money is not required. It is often non-refundable unless a contingency that allows the buyer to back out is met. If the offer is accepted, the earnest money is added into the down payment. This blog goes into more detail.

How does escrow work?

When it comes to real estate, escrow refers to a third party that exchanges money, documents, and other necessary items between the buyer and seller. An escrow officer will ensure that everything is collected, signed, and in legal order before the transaction completes, and the property and money changes hands.

In addition, it is very common to go through escrow when fully paying off your mortgage. An escrow officer will often oversee the final payment, record the closing, and file the paperwork with the financial institution to indicate the completion of the payment contract.

What is equity?

Equity is the amount of money the homeowner has paid off compared to the amount owed to the bank, as well as the home’s market value. For example, if you buy a house for $265,000 that was listed for $280,000, you have $15,000 in instant equity. That amount will increase in two ways

  1. With every monthly mortgage payment, you will own more of the total value of your house.
  2. As your home’s value appreciates over time, the added value is added as free equity in your home, just for living there. For example, Idaho homeowners saw an average home value equity increase of $29,000 in the last 12 months!

It is important to note that equity is not a tangible value for the homeowner. As a homeowner, you will never get a check for your equity amount. That amount is tied to the home’s value and how much you own of that total value. However, you can borrow against that amount in a Home Equity Line of Credit (HELOC). In addition, when you sell your home, larger equity amounts mean you get to keep more of the money from the sale of your home.

What are concessions in real estate?

In this case, concessions are not where you buy hot dogs, popcorn, and sodas. In real estate, concessions are offered by the sellers at the negotiating table as a way to incentivize the buyers to purchase the house. These can include:

  • Loan discount points – Points help reduce the interest rate, thereby reducing monthly payments. These are paid to the lender.
  • Warranties on the home/appliances – These involve the sellers covering the cost of repairs for a stated period of time after the sale.
  • Repair or payment credits – The sellers may reduce the selling price to cover the cost of needed repairs arising from an appraisal or inspection.
  • Closing cost assistance – Sellers can pay for some of the closing costs at the end of the transaction.

What are closing costs?

Closing costs are usually 2%-5% of the purchase price that are paid at the end of the transaction by both buyers and sellers. Closing costs involve taxes, appraisals, title search fees, and loan origination/processing fees. Closing costs are provided by the lender when the loan application is completed, so there are no surprises about what you need to pay. There is some room for negotiation between the lender, buyer, and seller about who pays what, but it is very case-by-case dependent.

Trackback from your site.

Leave a Reply