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10 Real Estate Terms

First-Time Homebuyers Should Know

Achieving homeownership is a rewarding experience that allows buyers to have a sense of stability in a space they own while building equity over time. However, it can be a daunting process for first-time buyers that are becoming acquainted with all the different terminology that goes into buying a home.   

By doing research and diving into the meaning behind what might seem like complex real estate terms, buyers can feel more confident as they dive into the buying process and work towards receiving their keys to their new home.

Here’s a list of Homeownership Terms First-Time Buyers Should Know:  


Appraisal
A home appraisal is conducted by an unbiased professional to determine the value of a house based on the current conditions of the market. Lenders use appraisals to determine the amount of money they will lend the buyer. Appraisals also protect the buyer to ensure they don’t overpay on a property. 
Here are some factors that are evaluated during the appraisal process:

  • Condition of a home
  • Location of the property
  • Size of land
  • Year built
  • Curb appeal
  • Major systems and home appliances

Annual Percentage Rate (APR)
An Annual Percentage Rate (APR) is the total yearly cost charged for borrowing money. In the home-buying process, it is the annual payment of interest on the total mortgage loan amount. This is not the same as an interest rate. Lender fees, closing costs, and insurance are included in an APR. 

Adjustable-Rate Mortgages (ARM)
Adjustable-Rate Mortgages (ARM) are loans with interest rates that change over time depending on the market.  They can also be called variable-rate mortgages. ARMs contain a fixed period and an adjustable period. Usually the initial fixed-rate period offers a lower interest rate, leading to a lower monthly payment during this introductory time. Once the fixed period comes to an end, the rate could go up or down for the remainder of the adjustment period based on economic factors. 

 

The 5/1 ARM is the most frequent adjustable-rate mortgage. It offers a lower interest rate during the fixed period of 5 years. However, the 1 represents the fluctuating rate in the adjustment period after that.  Although ARMs might provide a lower monthly payment during the introductory years, not knowing what your future monthly payment could look like makes it harder to find stability in financial planning.


Closing Costs
The occasion that a homebuyer meets to finalize the purchase of a new home is called "closing the sale" or simply "closing." At the closing, the necessary parties meet to complete the sale of a home by finalizing and signing mortgage documents. At that point, "closing costs" are paid, which are one-time expenses or "settlement fees." These costs compensate parties involved in the transaction, including the lender, title company and others. Closing costs are in addition to the home's purchase price; the homebuilder does not receive these cost payments. 
You can read more about what fees are included in our closing costs article.

Co-signer
A co-signer is a person that legally agrees to pay a debt if the borrower fails to do so. Cosigning is a type of joint credit, where the primary borrower will hold the responsibility of paying back the loans and making the payments. However, missing payments or making them late will go on to affect the credit of both the borrower and the co-signer. 

Borrowers with a co-signer usually use their leveraged credit to help them qualify for loan amounts that they would not qualify for on their own. 


Earnest Money
Earnest money, also known as a good faith deposit, is a deposit made to demonstrate that the buyer is serious about purchasing the home. This payment is usually kept in an escrow account until after closing when it is transferred towards the down payment or closing costs. 

The amount of the earnest money deposit on a resale home depends on the state of the housing market, but it usually ranges between 1-10% of the home’s sale price. For new construction, the earnest money amount is typically set by the builder. It is important to understand the terms of the contract agreement beforehand because the payment will be lost if the terms are breached. 


Escrow
An Escrow account is a legal concept representing a financial agreement where a third party retains the assets until a transaction is fulfilled. During the home-buying process, the earnest money will be put into an escrow account until the purchase is complete – protecting both the buyer and the seller.

Escrow accounts are also used by lenders after the purchase of a home to pay for a buyer’s property taxes and homeowners’ insurance. 


Equity
Home equity is the current value of a home minus the amount owed on a mortgage loan. For example, someone whose home is worth $300,000 and owes $50,000 on their mortgage has $250,000 of home equity. 

One of the benefits of home ownership is turning debt into wealth by building equity. As a home appreciates in value over time and payments on the mortgage are being made, equity is built and contributes to homeowners’ sense of security and financial stability.

FHA
FHA home loans, endorsed by the Federal Housing Administration, are a form of government-backed mortgage that allows borrowers to purchase homes without needing a substantial down payment or a perfect credit score/

But it's important to note that the FHA does not lend the money directly. Instead, they guarantee or insure the loan, reducing the risk for the lender and making it more likely they'll approve a loan for less established borrowers.

Learn more about FHA requirements and benefits here.


HOA
HOA stands for Homeowner Association, which is an organization that creates and enforces rules within their subdivisions or planned communities. HOAs typically collect monthly or yearly fees that are used for the maintenance of common areas and the overall appearance of the community – helping maintain the property values of the homes under their jurisdiction. The cost of HOA fees varies depending on the area and amenities within the community. 

 

Purchasing a home in an HOA automatically makes you a paying member. HOA members are encouraged to participate in voting for the board of directors, who oversee carrying out the daily responsibilities of the association.


At LGI Homes, we pride ourselves on providing a seamless, smooth, and transparent buying process as your partner throughout your homebuying journey. We hope that this glossary has helped shine light on the meaning behind common real estate terms.

Ready to find your brand-new home? Contact us today to take your first step towards homeownership.