Dreaming of $1 million mansions and browsing every lakefront listing in your home town is the fun and games type of real estate search. But when you actually become a potential buyer, the rules change.
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At this point, you need to know the nitty gritty, also known as the real estate terms that have bearing on your purchase. It's easy to gloss over the legalese being tossed around, or even the alphabet terms you're too shy to tell a real estate agent you've never heard before.
You won't need to have the real estate IQ of a seasoned real estate agent. But you do need to learn enough to avoid common pitfalls of purchasing a home, like neglecting to get an inspection or work with a buyer's agent.
And you also need to have enough of a real estate vocabulary to be able to recognize terms that indicate hidden costs of buying a home, from "earnest money" to "points" to "HOA dues."
This list of terms every new homebuyer should know will help you avoid costly mistakes and get a great deal on a new home:
The (1) buyer's agent, who represents you and the (2) listing agent representing the seller are the two agents typically involved in a home sale. Make sure to take advantage of a buyer's agent's services, since you don't pay them. Instead, they get their commission from the home seller.
A (3) pre-approval letter is recommended before you apply for a mortgage or even start looking for a home, according to Redfin. It comes from the bank and is an estimate of how much they'll lend you. It assures sellers you'll be able to get a loan when the time comes.
(4) Listings are simply real estate agent lingo for "homes for sale."
When you apply for a mortgage, the lender will require (5) an appraisal of your home's value from a licensed appraiser, who will assess the home's value based on comparable sales in the area and a property investigation. This should not be confused with (6) an inspection, which is completed after you've made an offer on a home and costs around $500-$1,000.
"The inspector will go through every nook and cranny, and review things like the plumbing, electrical, foundation, walls, heating, and appliances," Redfin noted.
Another term that's easily confused with appraisal is (7) assessed value. It's the dollar value a public tax assessor sets on the home to calculate taxes.
"This number is typically different from the value assigned by a private home appraiser, and sometimes different from what a home will sell for on the market," noted Four Seasons Sotheby's International Realty in its list of 21 Basic Real Estate Terms You Need To Know Before Buying Or Selling.
Once you've settled on a home, it's also important to understand the terms (8) fixed rate and (9) adjustable rate mortgages (ARM).These are a part of conventional loans. The fixed-rate mortgage has a predetermined interest rate that holds as long as you hold the loan, ordinarily 30 years. The adjustable rate mortgage involves a varying interest rate and usually comes in to play on a 5-, 7- or 10-year loan. "Adjustable rate mortgages can make financial sense if you're planning to sell or refinance your home before the introductory period ends; but if you're planning to own your home longer than five years, it's less risky to choose a fixed rate loan," Redfin noted.
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(10) Contingencies also come into play when you put in an offer on a home. You detail conditions that must be met before the deal goes through, for example a successful inspection or your loan application being approved. When a home for sale is listed as (11) "active with contingencies," that means the seller has accepted a buyer's offer but the final sale is dependent on the buyer meeting the contingencies that have been spelled out.
This differs from a sale that is (12) pending. Pending deals have all the contingencies settled but the final legal work hasn't been processed yet.
(13) Closing costs are one of the necessary evils of becoming a new homeowner. They typically amount to 2-5 percent of the purchase price of the home, according to Redfin, not including the down payment. The average closing costs include what you pay for excise tax, loan-processing costs and title insurance. Redfin also advises asking your lender about each fee involved in (14), the Good Faith Estimate, to see if you can shop around for a better price for such services as homeowner's insurance, wire transfers, underwriting and settlement fees.
Once you've started making payments on your new home, the fun part begins again. You can start establishing (15) equity, the difference between the home's fair market value, and the unpaid balance of the mortgage.
