Glossary of Terms Every Home Buyer Should Know
Buying a new home is a lengthy and challenging task. On top of all the decisions that need to be made, you might also find yourself being bombarded with words that you might not have heard before. So, to make things easier, we’ve prepared a glossary to help explain some of the terms you’ll hear throughout the house buying process:
Adjustable Rate Mortgage (ARM)
An ARM is primarily focused on interest rates and the fluctuation throughout the duration of the loan. This means that the loans are limited on how often, and by how much, the rates change.
Annual Percentage Rate (APR)
APR is the final cost and the last step before obtaining your loan. It includes the interest rate for a whole year, rather than just a monthly fee or rate. The final cost includes associated fees and costs with your loan, such as:
An appraisal is used to compare recent sales of similar properties. It is then used by lenders to determine the limit of what they will lend for that property.
In short, closing costs are the final payment of a real estate transaction and the title of the property is conveyed to the buyer.
Closing costs may include:
– Appraisal fees
– Credit check fees
– Escrow fees
– Loan origination fees
– Credit report charges
Contingencies are certain conditions that must be met for a contract to become binding. The seller and the buyer must agree to the terms and conditions of a contingency clause to bind a sales contract
Contingencies typically fall under three major categories:
– Home inspection
– Mortgage approval
Due diligence is investigating a property once entering an agreement, and before the purchase occurs. It is at this stage that you would research the history of the house and the neighbourhood, before settling on the wrong house. Your solicitor or conveyance specialist would assist with this stage.
Escrow is an account (not required for everyone) that is held by a third party who regulate payments required between two parties in a transaction. This account also assures that the seller can see that you have the money and that you are ready to pay.
Equity is the difference between the market value of your home and how much you owe to the lender on it.
Loan-To-Value Ratio (LTV)
The LTV Ratio denotes how much equity you have in your home. It looks at how much you owe as a percentage in comparison to the value of your home.
Private mortgage insurance (PMI)
If you do not have at least 20% of your down payment, PMI is required. It is designed to protect the lender — if you default, the insurance will reimburse the lender.
This glossary lists just a few of the hundreds of terms you may come across. We definitely recommend doing adequate research before signing any contracts, especially if you aren’t 100% sure that you understand the terms!