13 Real Estate Terms Explained

August 03, 2023

There are plenty of moving parts when it comes to buying and owning a home. It's no surprise then, that the terms that go along with the process might be a tad confusing, especially when people bandy around acronyms.

Take heart — you can get up to speed on the definitions in no time.

Here's a baker's dozen of some common real estate terms you need to understand when navigating the homebuying process.

1. APR When it comes to home loans, the annual percentage rate, or APR, is crucial when shopping for a mortgage from different lenders. The APR is a measure of the cost of borrowing money, expressed as a percentage rate. The APR includes not just the interest rate but also any points, certain lender fees, and other charges that you pay to get the loan. For that reason, the APR is usually higher than your interest rate.

2. An ARM may help baseball pitchers throw a wicked curveball but it also stands for an adjustable rate mortgage. An ARM offers a starting interest rate that's lower than a fixed-rate mortgage at the beginning of the loan period. At the end of that timeframe — such as five or seven years — the interest rate will adjust up or down, depending on market conditions. If the interest rate drops, your mortgage payment will be less each month, but if it rises, your payments will go up. With fixed-rate mortgages, the interest rate remains the same for the life of the loan and rates are generally higher than ARMs.

3. Closing Costs are expenses that go along with buying your home and you pay them at the closing of your real estate transaction. They include:

  • Processing Fee: This fee goes to the lender or mortgage broker for a credit check and processing your loan application.
  • Points: Discount points are optional fees paid to the lender at closing, resulting in a reduced interest rate. A loan with no points has a higher interest rate than a loan with one or more points.
  • Escrow Fee: The fee paid to an escrow company that acts as a third party and holds the earnest money until the transaction is completed.
  • Appraisal Fee: The amount the appraiser charges to determine the value of the home.
  • Title Search Fee: The fee charged by a title insurance company to research the home's title to determine that the borrower is the rightful owner and if there are liens on the property.

4. PITIstands for your total monthly housing expenses that includes:

  • Principal: The amount you borrow from the lender for your mortgage.
  • Interest: The interest you pay on your loan, over and above the principal
  • Taxes: The annual property taxes you owe on your home.
  • Insurance: Homeowners insurance premiums you pay to protect your property.

5. DTI refers to your debt-to-income ratio, which is the percentage of your monthly PITI payments as compared to your gross monthly income. There at two ratios. The first one compares your PITI to your income and the second compares your PITI plus you other monthly debt payments to your income. The lower these two ratios are the better qualified you will be.

6. Earnest Money Once you're serious or "earnest" about buying a home, you're required to put down earnest money as a show of good faith. The funds go in an escrow or trust account until closing. Then the money is put toward the purchase price at closing. Depending on market conditions, you may be required to pay $500 to $1,000 in earnest money or in a competitive market, as much as 2% to 3% of the home's sales price.

7. Escrow: Being in escrow is an arrangement where an escrow company acts as a third party and holds the earnest money — the money paid to confirm the contract — until you and the seller agree to the terms of the purchase and close the transaction.

8. HELOC, or a home equity line of credit uses the value or equity in your home to offer a sum of money you can borrow. Unlike a home equity loan that comes in a lump sum, a HELOC offers a credit line that you can draw from whenever you need to, up to your credit line limit. Once you pay off what you've borrowed, you have access to the funds again. After a set time period, usually 10 years, you can no longer draw funds from the HELOC and each payment will pay down the outstanding balance.

9. Impounds or "escrows" are not a temporary home for stray pets, but an account that is set up with your home loan to pay your property taxes and/or homeowners insurance. Each month, a set amount goes into the escrow account so your lender has the necessary funds to pay your annual property taxes and/or homeowners insurance, etc. on your behalf.

10. LTV isn't a recreational vehicle — but stands for loan-to-value ratio, which is the number that determines a ratio between the amount of the home loan and the value of the home. If you buy or refinance, lenders use this information to determine the risk of the loan, the borrowing amount available, and your approved interest rate. If you make a larger down payment when purchasing a home, this will lower your LTV and lenders will see you as a more financially committed borrower.

11. PMI Generally, if you put less than 20% down to purchase a home, you are usually required to pay private mortgage insurance or PMI. PMI typically costs from 0.5% to 1% of the loan amount annually and is included in your monthly payments. SchoolsFirst FCU offers mortgages with low or no PMI.

12. Prequalification Before you go home shopping, you'll want to know how much home you can afford and if you're financially ready to do so. To get prequalified, you share basic financial information including your annual income, assets, available credit and debt obligations. This will determine how much you may be able to borrow.

13. Rate Lock This is an agreement reached between you and the mortgage lender that allows you to lock in your interest rate during the processing of your loan. Usually, rate locks that are less than 60 days are free. The lender may charge more for longer-term rate locks.