Essential Key Terms for First-Time Home Buyers:
Help make purchasing a home a little less overwhelming by understanding a few common terms that frequently come up during the buying process:
Amortization: The process of paying off a loan through a series of periodic payments to a lender. The payments include two items: interest, which is what it costs you to borrow the money, and principal, which is the amount of money you borrowed.
Appraisal: A written estimate of the value of something. In real estate, it is a professional option of the market value of a property as of a given date.
Closing costs: The fees a seller and buyer pay to complete a real estate transaction. Generally speaking, you will want to budget between 3% and 4% of the purchase price of a resale home to cover closing costs. On the buyer’s side, most of the closing cots are related to the mortgage.
Current fair market value: Based on the market value of the asset (in this case, the home). The fair market value of a home is usually calculated by looking at the home’s current conditions and if it will sell within 30 to 90 days.
Down payment: A portion of the sale price you pay to the seller to close a sale. It is also the difference between the sale price of real estate and the mortgage amount.
Equity: Equity is net ownership. In other words, it’s the difference between how much your property is worth and how much you still owe on your mortgage (Market value – Mortgage balance = Equity). Equity is also sometimes called owner’s interest.
Fixed Interest Rates: An interest rate that never changes over the life of a loan. For example, if you have a fixed rate, 30-year mortgage, you will pay the same interest rate for the entire 30-year repayment period.
Gross Income: Your total income before any deductions.
Home Inspection: A close physical examination of a home to evaluate its plumbing, electrical, and heating and cooling systems, as well as its appliances, roof, foundation, and structural stability. The inspection should be completed before you purchase a home and your offer contract should state that purchase would be contingent on the home inspection results. There is a fee associated with a home inspection, but the fee is minimal in comparison to what you may pay later without one.
Market Value: The highest price that a buyer—ready, willing, and able, but not compelled to buy—would pay, and the lowest price a seller—ready, willing, and able but not compelled to sell—would accept. Market value is the basis for the “listing price” or the “asking price” of a home.
Mortgage: This is a legal document that pledges real property (such as a home) to the lender as security for the repayment of a debt.
Mortgage Default Insurance: This protects the lender in case you no longer can make your mortgage payments. Required on all mortgages with down payments of less than 20%, which are known as high ratio mortgages.
Mortgage Life Insurance: This type of insurance protects you and your family in case, for some reason, you are unable to make your mortgage payments. An individual life insurance plan may also be a better fit for some buyers as it offers greater peace of mind and less limitations on how you would use the policy payout.
Not interest-bearing: Non-interest bearing liabilities are exempt from any interest you may incur. Simply, if you receive a 100 dollar incentive that is non-interest bearing, the incentive will still be valued at 100 dollars.
Principal: 1) Principal is the original amount of a loan, excluding interest. Interest is charged based on the unpaid principal of a loan or credit account. 2) The remaining balance of a loan, excluding interest.
Title insurance: An insurance policy that protects residential or commercial property owners and their lenders against losses related to the property’s title or ownership.
Townhouse: A building complex with a number of houses that are either attached or built very close together.
Secondary suite: A secondary suite is a self-contained dwelling within or attached to a single detached, semi-detached or duplex. A secondary suite can be created through the conversion or development of a basement or other interior space; however, various municipalities may have restrictions on secondary suites.
Stress test: A strategic set of rules banks must use to determine if you qualify for a mortgage, and if so, how much you can borrow. The stress test is the bank’s ability to confirm if you going to be able to afford the mortgage payments if interest rates rise higher than what you qualified for.