Real Estate Terms Defined: Part 2

Real Estate Terms Defined: Part 2

Every industry has its own jargon, and real estate is no exception. Living in the South Bay, we’ve all heard the saying, “Location, location, location”, and we have a pretty good sense of what that means. But what about earnest money or fiduciary duty or PMI? Real estate lingo can add layers of confusion to an already convoluted process. Having a basic understanding of important real estate concepts will give you peace of mind now and could save you a fortune in the future.

So, we’ve compiled a list of the most commonly used terms you’re likely to encounter. Whether you’re buying in Manhattan Beach, selling in Hermosa Beach, or just plain curious, the following real estate glossary is part two of a three-part handy reference guide for anyone entering the real estate market. (Click here for part 1)

Adjustable-rate mortgage:

A mortgage loan with an interest rate that fluctuates in accordance with a designated market indicator — such as the weekly average of one-year U.S. Treasury Bills — over the life of the loan. To avoid constant and drastic fluctuations, ARMs typically limit how often and by how much the interest rate can vary. Many ARM products typically have an interest rate set lower than fixed-rate loans for a few years before resetting to a variable interest rate for the remainder of the term. These mortgages are a good option for buyers with lower credit scores, and those who intent to move and sell their home before the fixed-rate period is up.

Amortization:

The process of combining both interest and principal into mortgage payments, rather than simply paying off interest at the start. This allows you to build more equity in the home early on.

Appraisal:

In order to get a loan from a bank to buy a home, you first need to get the home appraised so the bank can be sure they are lending the correct amount of money. The appraiser will determine the value of the home based on an examination of the property itself, as well as the sale price of comparable homes in the area.

Back-up Offer:

In the intense world of offers and price negotiations, sometimes a home seller may have multiple offers. A “back-up” offer is when you have a second offer as back-up in case your first offer happens to fall through for some reason. Seen more and more in seller’s market conditions, back-up offers give the seller a strong stance in negotiations.

Counteroffer:

The rejection of an offer to enter into a contract, where the rejecting party includes a different offer that changes the terms of the original offer in some way. For example, if you offer $350,000 for a house, and the seller replies that he wants $375,000, the seller has rejected your offer and has made a counteroffer. The legal significance of a counteroffer is that it completely voids the original offer.

Dual Agency:

Dual agency is when one agent represents both sides, rather than having both a buyer’s agent and a listing agent. This can only be done with the knowledge and consent of both parties, and despite the seeming conflict of interest, the agent must still follow through with his or her fiduciary obligation to both clients, albeit limited.  The duty of loyalty is diminished in this agency, but the agent must still maintain confidentiality to each client and negotiate in the mutual best interest of both.

Earnest Money:

Earnest money is a deposit a buyer pays after a seller has accepted his offer on a home. It’s typically between 1 to 3 percent of the contract price and is held by the escrow company.

Earnest money is designed to protect the seller if the buyer walks away after the parties have gone into contract. However, buyers can get their earnest money back if a contingency allows them to cancel the contract. If the sale goes through, the earnest money is generally applied to the buyer’s down payment for the home.

Fiduciary relationship:

The relationship between a real estate agent and a client is called a fiduciary relationship. Fiduciary means faithful helper, and an agent is a fiduciary of the client. The agent always has an obligation to act in the best interest of their client while under contract. Through this commitment the agent must provide accountability, confidentiality, loyalty, obedience, care, and disclosure.

Fixed Rate Mortgage:

A mortgage loan that has an interest rate that remains constant throughout the life of the loan, usually 15 or 30 years.

Home Warranty:

This is a type of insurance that protects the homebuyer from future problems occurring with things like appliances, plumbing, and heating, which can be extremely expensive to fix.

Listing Agent:

Also known as the seller’s agent, this is the agent who represents the seller in the home-buying process.

Market Value:

The term market value applies to what the property would cost under “normal market conditions.” Some may consider it the ‘fair value’. Unlike the “assessed” value, which is a determination by the local authority, and the “appraised” value, which is a determination based on comparable homes in the market, it is basically the price a home would sell for in current market conditions.

Mortgage Broker:

This type of broker is an individual or company that is responsible for taking care of all aspects of the deal between borrowers and lenders, whether that be originating the loan or placing it with a funding source such as a bank.

Principle:

The principal balance of a mortgage loan is the amount of money owed to the lender, not including interest. Say you borrow $600,000. That’s the principal of the loan, or what you borrowed to buy the home. Buyers pay the principal plus interest each month. Payments nearly always go toward interest first, then toward paying down the principal. After all, the interest is the reason the bank agrees to make the loan.

Private Mortgage Insurance (PMI):

Insurance that reimburses a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed the lender (the mortgage plus the costs of the sale). A home buyer who makes less than a 20% down payment will most likely have to purchase private mortgage insurance, commonly referred to as PMI.

Realtor:

A Realtor is a real estate agent who specifically is a member of the National Association of Realtors. NAR has a code of standards and ethics that members must adhere to. Having taken the necessary training, every agent at Levine Homes is a certified Realtor and has a duty to uphold a higher standard of ethics to each one of our clients.

For more Real Estate terms, please refer to this Real Estate Dictionary.