Jumping into the world of real estate can be quite a shock. There are going to be times when industry jargon will be thrown at you like a 100 mph hot potato. Wikipedia and Investopedia can come in pretty handy, but they can also lead to an avalanche of links leaving someone even more confused. So SmartAsset put together 15 of the most common terms used in the industry.
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Adjustable Rate Mortgage (ARM)
A home loan where the interest rate is tied to some financial index, such as the London Interbank Offered Rate (LIBOR). Given the fluctuations in the index, the interest rate will change over time. Most of these mortgages have a cap on how high the interest rate may increase.
A detailed breakdown that illustrates how much interest and principal of the mortgage has been paid off and how much remains with each payment.
Someone that attempts to find properties with a lot of investment potential. Most often, this person is looking for a property in trouble and selling at a discount. This person will repair or remodel the property and attempt to sell it for large profit.
The transfer of the title of the property for money or other considerations.
The amount of money that a buyer pays up front in order to buy a property. This amount is typically between 5%-25% of the value of the property.
Fannie Mae/Freddie Mac
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are two government sponsored enterprises that were formed in order to create a second mortgage market. Together, they purchase mortgages and pool them together to create Mortgage Backed Securities.
This is a strategy where an investor or group of investors will purchase properties and resell them. Investors will profit from the resale of the property if its market value has increased either through price appreciation or repairs and remodeling.
When a third party holds property, cash, and the property title until all conditions of the property agreement have been satisfied. The third party, likely a lawyer, will then hand over the assets to the respective parties, as outlined in the agreement.
When a legal claim is put on a property in order to receive payment for debt or for services rendered. The holder of the lien can sell the property in order to recover their money.
Mortgage Backed Security (MBS)
A financial instrument that is backed by a mortgage or a pool of mortgages. There are two major risks when holding an MBS, interest rate risk and prepayment risk. Interest rate risk is how the asset is affected by the movement of interest rates.
This is a risk faced by someone who holds an MBS. If a homeowner unexpectedly pays off the principal of the loan, an MBS made from that mortgage loses its value. If that mortgage is part of a pool of mortgages that make up an MBS, the MBS’s value decreases to some degree.
When a potential buyer is screened by a lender or third party to see how much the buyer can borrow as well as the terms of the loan.
The rate that banks will provide to their best customers. Mortgage rates can be based on the prime rate plus some percentage.
When a property’s value is worth less than the balance of the mortgage on it. This is usually associated with drastic falls in the market value of the property.
The process a lender undergoes when determining to grant a loan or not. A lender makes their decision based on a variety of factors including, the borrower’s credit rating, credit history, the property value, etc.