Understanding Real Estate Terminology
By Tara Thomas
, last updated July 12, 2011
Understanding real estate terminology can be hard for those who are not familiar with the ins and outs of real estate. Since purchasing a new home is such an important decision, you want to make sure you’re armed with a little foreknowledge. Making sure you understand the terms being used will prove to be quite valuable. Familiarize yourself with a few common terms that will go a long way toward understanding real estate terminology.
Adjustable Rate Mortgages
An adjustable rate mortgage, or an ARM, is a mortgage in which the interest rate is not fixed and is subject to change. These changes depend upon the index that the interest rate is tied to. ARMs may be a way for homeowners to enter into a home they may not have otherwise been able to qualify for with a fixed-rate mortgage. Be sure to check with your loan consultant to have him or her explain to you what exactly an adjustable rate mortgage entails.
Closing costs are both the non-recurring and pre-paid costs associated with your loans. Non-recurring closing costs are any fees associated with purchasing a property or obtaining mortgage financing. These closing costs can include credit checks as well as underwriter or processing fees that the lender may have. Pre-paid items are recurring and include things such as property taxes or homeowners insurance. These costs are disclosed on the Good Faith Estimate, which gives the borrower an estimate of both the non-recurring closing costs as well as all pre-paid items. Lenders are required by law to supply borrowers with a Good Faith Estimate within three business days of receiving the borrowers application for a home loan.
Loan-to-Value or LTV
An LTV is the difference between the amount of the loan and the home’s appraised value or sale price expressed as a percentage. Use the lower of the two, when deciding if you should use the appraised value or sales price. Different loan products will have different loan-to-value requirements and this value can be reduced by making a larger down payment.
Interest rates fluctuate daily, and in order to ensure you are guaranteed a specific rate, a lender will lock-in a rate for a period of time at a cost to the borrower. This protects the borrower against interest rates rising before the loan process is completed. Bear in mind, if the rate changes for the better, you will still be locked-in at your previous interest rate. A lock-in is also known as a rate lock.
Mortgage insurance protects the lender in case the borrower defaults on the loan. Mortgage insurance is typically required on all loans with an LTV of 80% or more. The mortgage insurance is usually included in the monthly mortgage payment, but arrangements can be made to pay MI directly. For FHA loans, MI is required regardless of the LTV.
A real estate agent is an active member in a local real estate committee that is associated with the National Association of Realtors. Only real estate agents that are associated with the National Association of Realtors can call themselves a Realtor.
Truth-in-lending or TIL is a federal law that orders lenders to fully unveil any and all conditions of the mortgage in a written document.