So, you’re ready to buy your first house. Much to your surprise, there’s a whole new language you need to learn during the process. Real estate has many different terms, phrases, and acronyms that every first-time buyer needs to familiarize themselves with before they jump into the market.
Don’t worry, the experts at The Degnan Group are here to explain the most common real estate terms that every first-time-buyer needs to know.
Escrow
Even though this word may sound more like a fancy French dish than a real estate term, escrow is actually very simple. Basically, it’s a third party (like a bank or law firm) that holds the agreed upon money for the sale.
Example: If you’re in talks to buy a home with a $2,000 EMD payment, you will put that money in escrow. That way, you can rest assured that the seller can’t take it and run off, or refuse to return it if the inspection changes the home worth.
The seller also knows this isn’t a waste of their time, and that if all goes according to plan they are guaranteed to receive the money for the sale when they sign the deed. Once the sale is finalized, the third party disperses the agreed upon amount of money to the seller and the deed to the buyer, and everyone leaves the transaction satisfied.
Earnest Money Deposit (EMD)
This is a small amount, typically a couple thousand dollars, that a buyer pays the seller to show that they are serious about the house and are ready to start the buying process.
Example: If a buyer ties up the seller for weeks and then backs out of the purchase, the seller keeps the EMD money. If the buyer completes the purchase of the home, the EMD money simply goes toward the down payment of the house (and is not a separate fee.)
When making an EMD payment, make sure to include a contract with contingencies. These list certain reasons why you can back out of the purchase and still keep your money, like the inspection turning up unforeseen damages, or an unexpectedly low appraisal.
Closing Costs
If you’re about to begin the buying process, you know it’s not as simple as just writing a check. There are many steps to take between finding one you like and moving into it, and paying the closing costs are one of them. Simply put, closing a home is when you finalize the sale, and the closing costs are all the extra fees associated with it.
Example: These usually include the down payment, fees for attorneys, commission for the real estate agent, and any other small costs like title insurance, appraisal fees, homeowners insurance costs, and more. Make sure you keep these in mind throughout the sale, so you don’t get blindsided by extra costs at the end!
Down Payment
All your friends are saving for one, and your parents are hassling you about what they think is enough for one. But, what exactly is a down payment on a home? It’s the amount of money you pay upfront for the purchase. Then, the rest of the cost is covered by a loan.
Example: Down payments are calculated by percentages, and it’s best to be able to pay at least 20% of the total home cost as a down payment when you purchase. That means, if you want a $200,000 home, you need to have a $40,000 down payment saved. 20% is just a starting point though. A larger down payment means a smaller loan, which will lower mortgage costs, decrease the amount of interest paid, and save you money in the long run.
Equity
This word is thrown around constantly in the real estate world, so it’s important that you understand what it means. The equity of your home is the amount that you have paid off and already own. It changes over time when the value of the house changes (either up or down) and as you pay off your mortgage.
Example: Home equity is a simple equation. Value of your home – the loan you still owe = home equity. If your house is worth $200,000 and you still owe $50,000 to the bank, then your home equity is $150,000.
Comps
Comps is the real estate slang term for comparative sales, and are the values that similar homes have sold for. Looking at comps, or selling prices, for similar houses in the area can help you understand and pay the fair value for your home, and have a better idea of what it will be worth in the future.
Example: You and your real estate agent will look at comps in the neighborhood you want to buy in. Have the last four houses sold for $100,000, but the one you’re looking at is asking for $200,000? Usually, that means something isn’t right.
Additionally, if you look at comps over ten years in one neighborhood, it’s possible to see if they are trending down or up. If sale prices have steadily gone down, that’s a sign you should skip this neighborhood and move on to the next. It’s best to buy in neighborhoods that have shown the houses are appreciating in value, and the comps are going up.
Are you a first time home buyer? If so, make sure you study up on your real estate lingo and understand these six essential terms before you begin your home buying process!