So, you’re thinking about buying your first home. Congratulations! Owning a home is a huge accomplishment and investment; you’re not the only one who thinks so. According to the data presented by the National Association of Realtors (NAR), first-time home buyers made up 34% of all property buyers in 2021.
This is an exciting time. But it can also be a confusing time, especially when it comes to all the real estate jargon you’ll need to know. Don’t worry. Here are ten essential real estate law terms you need to know as a first-time home buyer.
1. Mortgage
A mortgage loan is a loan that’s used to purchase a property. The mortgage itself is a contract between the borrower and the lender, in which the former agrees to make regular payments over a set period (usually 15 or 30 years). In return, the lender agrees to provide the borrower with the funds necessary to purchase the property. There are different types of mortgage loans, but the most common are fixed-rate mortgage loans and adjustable-rate mortgage (ARM) loans.
2. Fixed-Rate Mortgage Loan
As the term suggests, a fixed-rate mortgage loan has a fixed interest rate that does not fluctuate over its life. This means that your monthly mortgage payment will always be the same, making it easier to budget for. One thing to keep in mind is that they usually have higher interest rates than ARMs. This is because the lender is taking on more risk by offering you a loan with a set interest rate.
3. Adjustable-Rate Mortgage Loan
On the other hand, adjustable-rate mortgage loans have an interest rate that can change over time. The initial interest rate is usually lower than a fixed-rate mortgage loan, but it can change depending on market conditions. The benefit of an ARM is that your monthly mortgage payments could potentially be lower than a fixed-rate mortgage loan. The downside is that you could end up paying more in interest over time if the interest rate goes up.
4. Escrow account
When you’re in the process of buying a home, your lender will likely set up an escrow account for you. This is an account that’s used to hold money for things like property taxes and homeowners insurance. Once these bills are due, the money will be withdrawn from your escrow account and used to pay them. The benefit of having an escrow account is that you don’t have to worry about coming up with a large sum of money up front to pay your property taxes or homeowners insurance. The downside is that you’ll need to make sure there’s enough money in your account to cover these expenses, and if there isn’t, you may end up being responsible for the shortfall.
5. Contract
A legally binding agreement between two or more parties. In real estate, a contract is usually between a buyer and a seller and outlines the terms of the sale. For example, the contract will specify the purchase price, the closing date, any contingencies, and what happens if either party doesn’t uphold their end of the deal.
6. Earnest Money Deposit
Also, called a “good faith deposit,” this is money paid by the buyer to the seller to show that they’re serious about buying the property. The amount varies but is typically 1-2% of the purchase price.
7. Title
A document that proves ownership of a piece of real estate. The title is usually held by the lender until the loan is completely paid off, at which point it will be transferred to the buyer.
8. Title Insurance
An insurance policy that protects the buyer (and sometimes the lender) against losses arising from problems with the title, such as hidden liens or encumbrances.
9. Appraisal
A professional evaluation of the value of a piece of real estate that is typically performed by a licensed appraiser. Lenders often require appraisals when considering loan applications, and buyers may request one to get an independent estimate of a property’s value before making an offer.
10. Closing Costs
Costs associated with buying a property, such as loan origination fees, title insurance premiums, and escrow or attorney’s fees. Closing costs are typically paid by the buyer at closing but may be included in their loan or negotiated as part of their offer on the property.
Those are some of the terms that can help clear up some of the confusion surrounding real estate jargon. Of course, there are many other terms you’ll need to know as you begin your home-buying journey. But armed with this basic knowledge, you’re well on your way to becoming a savvy first-time home buyer.
