Buying a Home 101

New to the world of real estate?
Here are some basic terms to get you started.

An ARM is a type of mortgage loan that is often considered riskier than its counterpart, the fixed mortgage. With ARM loans, there is an initial period of a fixed rate, and then the remainder of the loan’s interest is tied to an economic index. The loan is considered risky because the economic index can fluctuate, but some people prefer it since it can potentially yield lower interest rates.

Closing refers to the finalization of the sale of the property. In order to close, all parties must sign the required documents, the closing costs must be paid, and the money for the property must have already been transferred (or the lender’s approval must be proven). In most jurisdictions, the deed must be handed over as well.

Also known as a “good faith deposit,” an earnest money deposit ranges between 1-5 percent and is an upfront payment that the buyer is asked to put down once the seller accepts his offer. It shows the seller that the buyer is serious and will likely close

A letter issued by a lender that identifies the terms, loan type, and loan amount for which the buyer qualifies. A pre-approval letter is important since it gives potential buyers a solid idea of what they can afford. It is also required by many sellers when a potential buyer makes an offer since it shows that the buyer will be able to finance the purchase.

When taking out a mortgage, the principal is the amount of money owed to the lender, not including interest. When paying back the mortgage loan, buyers pay the principal plus interest.

The date on which the seller must vacate the property and on which the buyer assumes ownership.

Also known as a selling agent, a buyer’s agent is a licensed real estate professional who works on behalf of potential buyers to help them find a suitable property. A buyer’s agent can also negotiate with the seller on behalf of the buyer to get a better closing price.

The fee paid to the real estate agent or broker who facilitated the sale of the property. Usually, buyers pay a commission to their agents, but in some cases, sellers may also be required to pay commission to their agents.

This is considered the safest type of mortgage loan since the interest rates are fixed. Buyers who take out this kind of mortgage pay the same interest rate over the life of the loan.

An offer is the official way that potential buyers inform the seller that they are interested in buying. The offer can be the list price or lower. If the seller does not accept the offer right away, the buyer may make a counteroffer. The buyer and seller can negotiate until an agreement is reached.

If buyers are not paying the whole sum in cash (which is usually the case), sellers will require proof of funds to prove that they can really finance the purchase. Proof of funds is typically an official statement from the buyer’s bank.