Knowing home finance terms is important for home buyers because it allows them to make informed decisions, whether they are purchasing a property or obtaining a mortgage loan.
Having a clear understanding of these terms can help in the following ways:
- Setting a budget
- Understanding the costs
- Evaluating options
- Negotiating Effectively
- Preparing for the future
Knowing the terms related to mortgages such as interest rates, principal and down payment, helps buyers determine how much they can afford to spend on a home and what their monthly mortgage payments may look like.
By understanding terms such as closing costs, escrow, title etc. can help buyers to anticipate and budget for the additional expenses that may be associated with purchasing a house. For negotiations, knowing terms such as appraisal, title and closing costs helps buyers to negotiate the price and terms of a purchase with a seller, as well as understand the costs and processes involved in buying a house. Knowledge of terms such as equity, default and foreclosure may help buyers evaluate the risks and potential benefits of different types of mortgages to make the best financial decisions.
Terms such as appreciation and equity help buyers anticipate the potential financial returns on their investment in a home, and plan for their long-term financial goals. Being aware of all these aforementioned terms helps home buyers understand the process they are going through and gives them the ability to make educated decisions about their purchases, which saves them from potential financial pitfalls and headaches.
Here is a break-down of terms every Homebuyer should know:
- Mortgage: A loan that is used to purchase a property
- Principal: The amount of money borrowed on a mortgage loan, not including interest
- Interest: The cost of borrowing money on a mortgage loan, expressed as an annual percentage rate
- Down payment: The amount of money that is paid upfront towards the purchase of a property, usually a percentage of the purchase price
- Closing Costs: The expenses that are associated with the sale and purchase of a property, such as appraisals, title insurance and attorney fees
- Title: A legal document showing ownership of a property
- Appraisal: A professional assessment of the value of a property
- Equity: The difference between the market value of a property and the outstanding balance on the mortgage of same property
- Escrow: A neutral third party that holds funds or documents for the buyer and seller until the transaction is complete
- Default: Failure to make mortgage payments on a timely basis
Other important and commonly-used terms that need a detailed overlook are as follows:
100% offset
An offset account is a transaction account linked to your home loan, and the money available in it acts the same way as if it was in your mortgage account. As the name suggests, it ‘offsets’ the balance on your loan on which interest is calculated to help reduce your interest repayments (helping you pay off your loan sooner).
Appraised value
This is the estimate of the value of a property which is being used as security for a loan.
Contract of sale
A legal document that outlines the terms and conditions for the sale of a property between a buyer and a seller. Your solicitor or conveyancer will usually review this before purchasing property.
Fixed interest rate
With this, your home loan’s interest rate will not change for a set time (often between 1 to 5 years). This option may suit borrowers who want greater certainty with their regular payments throughout the fixed term.
Fixtures
Items that are permanently attached to a property such as lights, ceiling fans and landscaping. If removed, these may cause damage to a property.
Home loan deposit
The amount of money put into a bank account or left with a person (or company) to secure the purchase of a home.
Interest rate
Whenever you borrow from a lender, you will be charged interest, and the interest rate is a percentage that a lender uses to calculate interest charges on your home loan balance (what you still owe them).
Loan term
The loan term is how long your loan will last, unless you pay it off earlier. The length of your loan term may change if you refinance.
Mortgage
This legal document is drawn up between a borrower and a lender, giving the lender a conditional right to the property held as security for the repayment of the money lent.
Mortgagee
The person or organization who lends money to purchase property or goods.
BOTTOM LINE
Home buying terminology is a useful resource throughout the buying process, as it helps build up your confidence when you move into a competitive market.
It is also crucial to note that this list does not include all of the terms used for Home Finance, and that other terminology exists that has not been mentioned here. For a full list of terms to help guide you in the home financing world, make sure to read up, research and discuss with real estate consultants, as well as ask around if you are connected to someone who may be able to help and guide on important matters (such as landlords, property owners and builders/developers).
When you prepare to buy your first home, you may be ‘pelted’ with words that seem foreign or are being used in a different context, catching you off guard. To understand the ‘lingo’ of home finance, knowledge of some most common real estate terms is important.
