Addendum:
Adjustments made to a property’s contract and typically facilitated by the real estate agents of each buyer and seller. Addendums are legally binding when both buying and selling parties have acknowledged the change.
Adjustable Rate Mortgage (ARM):
A loan that initially charges a lower interest rate. The interest rate increases according to the loan. There are a multitude of ARMs available; adjustable interest rate terms vary per loan. For example, a 5/5 ARM offers an interest rate that remains fixed for the first five years. The rate adjusts every five years, no more than 2.0% each adjustment. The total rate increase will never exceed more than 5% above the initial rate.
Because adjustable-rate mortgages initially charge less interest, your mortgage advisor will ask how long you intend to live in the property. Is it a starter home? Do you have plans to eventually move? You might want to buy “more house” with the spending power of a lower interest rate, provided that when the rate increase occurs, your plans include refinancing, selling the property, or simply affording the rate difference.
Annual Percentage Rate (APR):
This includes your interest rate – annual interest charge – plus any points or lender fees. Your APR is thus usually higher than your locked interest rate.
Appraisal:
An analysis performed by an “appraiser” to determine a property’s value. An appraiser is an independent contractor hired by the lender (see Lender). Once a buying contract is signed, the lender will schedule an appraisal to evaluate a property; properties are assigned a total value based on square footage, neighborhood, recent comparative home sales in the area, property condition and more.
In order for a lender to finance a home, the property must appraise at the agreed sale price.
Should the property appraise for a higher amount, the difference is known as a homebuyer’s instant equity (see Equity), and the potential homebuyer commences a happy dance! Should the home appraise for lower than the contract price, the lender is loaning more funds and must agree to lend more money to the buyer, or, the buyer must make up the difference with cash. In a “buyer’s market” (see Buyer’s Market), the seller is often willing to adjust the sell price to meet the appraised value.
Buyer’s Costs (see also Selling Costs):
A common misconception is that a buyer is only responsible for the house purchase price. However, there are multiple requirements involved when buying real estate, and each element and company charges a fee. In addition to the property purchase price, the buyer also pays additional costs at closing:
Inspection fee
Appraisal fee
Buyer closing costs, e.g., lender’s title insurance, escrow fees, recording fees
Homeowner’s Insurance (one year)
Property/county taxes (up to six months)
Lender fee(s) – BECU, as a not-for-profit credit union, returns its profits to the members in the form of fewer fees (vs. a typical financial institution)
Masseuse (optional – this can be a smidge stressful!)
See the below example:
Lori buys a 4 bedroom, 2.5 bath rambler for $475,000.
Lori’s terms = $50,000 down payment/$14,250 earnest money (3% of the sale price)/30-day close
Lori pays an inspector to inspect the home
Lori delivers an earnest money check for $14,250 to the title company (see Title Company)
Lori finances the remaining $425,000 owed with BECU
During the 30-day closing period, BECU “orders” an appraisal, charging Lori the fee
Lori owes, at closing, the remaining $35,750 ($50,000 minus earnest money) + homeowner insurance, property tax, lender fee and miscellaneous closing fees
Lori owes, at closing, an additional $40 – 43K or so
Buyer’s Market (see also Seller’s Market):
A housing market that favors the buyer. A buyer in a buyer’s market gets the pick of the pile! A buyer’s market typically involves excess housing inventory (multiple properties from which to choose) and the ability to then negotiate favorable buying terms, e.g. paid repairs following an inspection report, seller-paid closing costs, or a lengthier closing period.
Closing Costs (see also Buying Costs and Selling Costs):
The fees collected at the “close” of a real estate transaction. All funds are collected by a third-party title company (see Title Company). Buyer and seller pay different fees; the seller paying commission and sales tax; the buyer paying acquisition fees, such as lender, appraisal and escrow costs.
Closing Date:
The day, month and year agreed by the buyer and seller in which to complete the buying process. The date is noted in the offer. The transaction paperwork must be signed by all parties and the sale funded, then recorded, into the county’s records before or on the closing date. Buyers can accomplish the buying process before the actual date, and all taxes and fees will be prorated in accordance with the contracted closing date. Buyers and sellers will also use the date to schedule utilities.
Closing Period:
The length of time between signing the buying contract (offer) and the closing date (see closing date).
Contract (see also Offer):
The legally binding paperwork facilitating the sale of a property. The contract can be adjusted based on buyer/seller requests; adjustments (or, addendums) are facilitated by both parties’ real estate agents. Earnest money discourages broken contracts (see earnest money).
Not to worry – there are few permissible methods in which to break a contract. A buyer can legally back out due to “lost” financing, an “unclear title” (see Title), failed inspection, or when the seller fails to meet contracted dates. Likewise, a seller can back out of a sale should the buyer not meet contracted dates.
How does a buyer “lose” their financing? Although uncommon, lost financing occurs due to a variety of circumstances: the buyer is affected in such a way to impact their finances, including injury, legal trouble, divorce, job change, etc.; or, the buyer’s finances ultimately do not meet the lender’s standards.
Commission:
Percentage of the home sale paid to the real estate representative of both the buyer and seller. A typical commission to each agent is 3%. Sound steep? If you have the right agent, they are worth every penny! The commission is extracted from the purchase amount paid to the seller (see Selling Costs).
Credit Score (also known as a FICO Score):
A credit score is a rating between 300 – 850. It is calculated by culminating an individual’s payment, debt and credit history. Negative factors, such as missed payments, detract from one’s score. Positive factors, such as reduced debt, will increase one’s score. Mortgage advisors consider both the credit history and score as part of their lending decision. The better the score, the lower your loan’s interest rate!
Earnest Money:
A percentage of the buyer’s down payment that is paid once a contract is signed. Earnest money is kept by the title company (see Title Company), and is contributed toward the overall buying costs.
An earnest money percentage can vary; the higher the amount, the better the offer. Why? It shows dedication to a property: Sellers receive the earnest money (subsequently, buyers lose the earnest money) should the buyer “illegally” back out of the contract. However, it is rare for a buyer to back out of a contract and forfeit their earnest money (see Contract).
Equity:
The accumulated (either by outside influences or paid funds) value of a property. Outside influences can include inflation, deflation, neighborhood condition, property condition and amenities, and can increase or decrease a property’s value.
See below examples:
Heidi pays $25,000 as a down payment to buy a $295,000 bungalow.
The Jenkins’ 40-year-old property was purchased for $50,000. They have since paid the mortgage in full.
The bungalow is appraised at $310,000.
A similar, upgraded house in the neighborhood sells for $750,000.
Heidi’s property immediately gains $15,000 in ”instant” equity.
The Jenkins must factor condition in their home’s value; their home is thus valued at $665,000.
Heidi’s home equity equals $40,000: $310,000 minus money owed ($270,000).
With nothing owed, the Jenkins’ equity is $665,000.
Escrow:
A third-party entity that receives and pays your mortgage, property tax, homeowner’s insurance and (if applicable) PMI costs. Your lender (BECU) will establish the escrow account on your behalf; you simply pay the bill each month. Your bill will include the monthly loan principle and interest charge, property tax, homeowner’s insurance and applicable PMI.
Many lenders, like BECU, require participation in an escrow account. It not only saves you time – who wants to save up and pay a tax bill every six months? – your lender is also rest assured all of your financial obligations are fulfilled. Your lender ultimately wants the best for you, and an escrow account helps with that.
Excise Tax (see also Property Tax):
Excise tax is essentially a property sales tax: The fee charged on the sale of real estate. It is collected by the state. Real estate excise tax is typically paid by the seller, and is paid at closing. The rate varies from 1.5 – 1.9% in each county; a simple estimate is to round up to 2% of the sale price. So, a $200,000 property would be charged a little less than $4,000.
Fixed-Rate Mortgage:
A loan that charges the same interest rate for the entirety of the loan. Pro? Get peace of mind as your rate never increases. Con? Fixed-rate mortgage interest is higher than adjustable-rate mortgages. Your mortgage advisor will ask how long you intend to stay in the home –the longer you reside at a property, the more a fixed-rate mortgage makes sense.
Homeowner’s Insurance (also known as Hazard Insurance):
Much like auto insurance, home insurance guarantees a structure is restored should it be damaged. Homeowner’s insurance is required by law on all financed transactions; the first year of which is paid at closing as part of the buyer’s closing costs (see Buyer Closing Costs). As long as the policy meets lender requirements, the buyer can shop around and select an insurance carrier and policy.
Inspection:
A thorough review of the inside and outside of a home. Home buyers, not lenders, initiate an inspection either before or after an offer; the terms of a buying contract may dictate whether an inspection affects the sale of the home. Buyers can opt to terminate a sale with a failed inspection.
Inspectors have limits – they lack x-ray vision and cannot see inside interior walls – however, what can be seen is compiled into a thorough report. Inspectors grade a home’s condition regarding its foundation, structure, plumbing, fixtures, appliances, crawl spaces, utilities and more. Inspection costs vary, and are typically based on the size of the property. The buyer pays for the inspection.
Interest Rate:
The amount of interest in which you will be annually charged to borrow money. The lower the interest rate, the less your monthly payment. Your lender can “lock in,” or guarantee, an interest rate for a specific window of time; your closing period usually takes place during this window.
How to lower your interest rate? First and foremost, start with excellent credit. Then, consider a shorter loan: The shorter the payback time frame, the less the interest rate. You’ll also want to shop the current marketplace. Rates can vary based on a multitude of factors (stock market, global market, etc.). Investigate whether financial experts advise buying now or later.
Lender:
Your homebuying best friend. It’s also the term used for the financial institute that is loaning, or “lending” the funds to finance a property. Lender can be used plural or singular: Plural, the financial institution as a whole; singular, your individual contact at the financial institution (also called Mortgage Advisor at BECU).
Mortgage Advisor (see Lender):
Your BECU homebuying financial contact, guide and advisor.
Offer:
The buying contract, signed by the buyer, that lists purchase price and terms. Terms can include the closing date, inspection addendums, requests for home appliances and more – the hotter the real estate market, the more a buyer’s real estate agent will adjust the terms to favor a seller and hopefully “win” the bid.
Points:
An interest rate unit of measure. Buyers can “buy down” or purchase points to lower their mortgage’s interest rate. Each point is assigned a cost. Have extra cash on hand? It might pay to initially buy down your rate – you’ll pay more up front, but less in interest over the life of the loan. Ask your mortgage advisor regarding your loan type and points.
See the below table:
Basis Points
Percentage Terms
1
0.01%
10
0.1%
50
0.5%
100
1%
1,000
10%
10,000
100%
Private Mortgage Insurance (PMI):
Lenders typically require a 20% minimum down payment on a home. As home prices and the cost of living creep up, saving 20% of a home price can be daunting. Happily, lenders allow potential homebuyers to purchase a home with a lower down payment in exchange for a mortgage insurance fee, or, PMI.
Because credit unions (like BECU) return profits to members in the form of fewer fees and lower rates, a credit union typically charges a smaller PMI fee. Regulations vary per transaction, financial institution and state, but buyers usually must pay PMI until their paid equity has reached 20%; buyers are often required to pay PMI for a minimum of two years, regardless of reaching the 20% threshold.
Qualify for a VA Loan? Despite purchasing a home with less than 20% down, qualifying veterans may avoid PMI.
Property Tax (see also Excise Tax):
Property tax, or county tax, is paid bi-annually by the homeowner. Property taxes are collected by the state and contribute to a variety of state-funded programs, including transportation, schools, public safety and more. Your home value determines the amount you are taxed; falling home values typically result in falling property tax (a phenomenon that occurred during the Great Recession).
You may elect to directly pay property taxes, or, you may use the convenience of an escrow account (see escrow account), allowing a third party to pay them on your behalf. BECU offers this service.
Rate (see Interest Rate)
Real Estate Agent:
Your other best friend (see Lender). Your confidant, advisor, and ultimate defender – make sure you pick an agent you are comfortable peppering with questions; likewise, ensure you trust their advice throughout the process.
A real estate agent is different from that of a realtor; realtors are certified real estate agents who adhere to an additional Code of Ethics (www.realtor.org).
Whether buying or selling a home, a real estate agent should always look out for your best interest – be it frank, honest advice about a neighborhood, financial transaction, or home inspection, find an agent whose opinion and business savvy you trust. A good agent can write you an offer on a home; a great agent will negotiate you into that home – or find you one that’s even better.
Selling Costs (see also Closing Costs):
Despite a buyer paying the seller an agreed price, the profit is how much money is earned after fees are removed.
Selling costs:
Buyer/Seller real estate agent commission fees
Seller closing costs, e.g., owner’s title insurance, escrow fees, courier fee, notary fee
Outstanding home liens (e.g., utilities)
Outstanding money owed on home mortgage(s)
State excise taxes
See the below example:
Rob bought his 3 bedroom, 2 bath craftsman for $300,000.
Ten years later, Rob owes $200K of his home loan.
Rob sells the craftsman for $550,000.
Before fees, Rob would receive about $350,000.
Fees are removed.
Rob receives around $300,000 and goes to Vegas invests his money in a new property.
Seller’s Market (see also Buyer’s Market):
A housing market that favors the seller. If you’re selling, you’re a happy camper: Seller markets typically offer low housing inventory to meet housing demand. The buyer is forced to act quickly and sometimes aggressively to “win” a house, e.g., a bidding war that increases home price, waived inspection (or inspection with no concessions paid by seller) and a quick closing period.
Title:
Official documentation linked to the property: A title can be held by multiple parties who own either a legal or equitable interest. A title that is “clean” or “clear” is a title that does not pose a problem – there are no outstanding creditor liens, levies, and no property ownership dispute.
Third-party companies called Title Companies (see Title Companies) facilitate the review, transfer and recording of a property’s title. They also conduct the funding of the home sale.
Title Company:
Acts as a third-party intermediary to both buying and selling parties; the title company collects and holds any earnest money, as well as collecting all buying and selling costs. It funds the sale from the lender’s financial institution and is responsible for recording the sale with the county. Once a sale is “recorded,” the profit (see Selling Costs) is released to the seller, and the keys are given to the buyer. Break out the bubbly!
Other Resources
http://www.fool.com/homecenter/glossary/glossary.htm
http://www.realestate.com/advice/real-estate-glossary/