Beginner-Friendly Guide to Financial Real Estate Terminology

Owning a home is a goal that many Americans dream of. It can positively impact your financial portfolio and help you reach new milestones and grow home equity. But understanding all the financial real estate terms can be overwhelming when you’re learning how to buy a house.

For example, what is a fixed-rate mortgage? What’s the difference between pre-approval or pre-qualified? This guide will help provide an overview of common financial real estate terminology you might encounter so you can sign all that paperwork with total peace of mind.

Finance-Related Real Estate Terminology

To make sure that you’re prepared to navigate the homebuying process, read on for an overview of the real estate terminology you’ll encounter. 

What is a first-time homebuyer program?

First-time homebuyer programs help those with low or moderate income or with less than stellar credit scores secure a mortgage to purchase a home and become homeowners. First-time homebuyer programs are an effective tool for many to take that first step toward homeownership, because they can get assistance with the purchase price. These programs vary by region or state. 

What does pre-qualified mean?

Being pre-qualified for a loan means a lender gives you an estimate of what you are able to borrow based on current financial indicators such as income, debt, and assets. Getting pre-qualified is a great first step to take and will help you begin to identify what you can buy. Once you’ve been pre-qualified, it’s important to keep your information up to date with your lender. Again, this is a great first step to take, and one that can save you time and energy in the long run!

What does pre-approval mean?

Pre-approval for a mortgage is the preliminary evaluation of a potential borrower by a lender to determine whether the borrower can be pre-qualified for a mortgage. The amount of money that you are pre-approved for will depend on a number of factors. Underwriting happens when a mortgage lender has successfully verified the homebuyer’s income, assets, and debts to determine how much risk the lender will take on when issuing the mortgage loan. 

What is a loan?

A mortgage loan is the lending of money from one party to another. With a loan, there is the lender and the borrower. The borrower will pay interest, or a percentage of the principal amount, back to the mortgage lender over time through their monthly mortgage payment. There are many types of mortgage loan options, including a Federal Housing Administration (FHA loan), VA loan, or conventional mortgage loan.

What is a mortgage?

A mortgage is a loan between the borrower and a lender that allows you to borrow money used to purchase real estate for which that property then serves as collateral. In a mortgage, a borrower and mortgage lender agree to terms based on the home’s sale price and the money borrowed is repaid in installments. 

If the terms are not met or the borrower fails to make payment, the lender acquires the property. The mortgage loan is considered secure because it is backed by an asset — the home — and the mortgage lender will in turn accrue interest on the loan paid over time. 

In order to secure a mortgage loan, the homebuyer is typically required to hire a professional to assess the appraised value of the home and determine the fair market value. 

What is a fixed-rate mortgage?

A fixed-rate mortgage is a loan where the interest on the note remains the same throughout the term of the loan. You pay a set amount with no changes over time.  Unlike an adjustable rate mortgage, the interest rate on a fixed-rate mortgage does not change regardless of whether the mortgage loan is 30 years, 15 years, or another term length.

Having a mortgage with a fixed rate is a pretty conservative financial strategy. This can give the borrower peace of mind knowing that they are paying the same amount month over month.

What is a homeowners association? 

Whether you have a condominium, townhome, or single-family home, there’s a good chance there will be a homeowners association. A homeowners association, also known as an HOA, is a governing body that enforces rules and guidelines for the community. HOA fees are not included in closing costs or the down payment. Instead, the buyer can expect to pay fees every month. 

What are closing costs? 

A homebuyer is required to pay closing costs as part of the real estate transaction in securing ownership of a property. Traditionally, this includes property appraisals, mortgage loan fees, and attorney fees. You can expect to pay 3-5% of the mortgage loan amount in closing costs. 

What is earnest money? 

Earnest money refers to the amount that an interested buyer will put down before closing to show their commitment to buying a home. Also known as a good faith deposit, earnest money is common to entice sellers during a competitive real estate market. Prospective buyers indicate their earnest money deposit in their offer.

What is private mortgage insurance? 

Private mortgage insurance, also referred to as PMI, is a type of insurance that is often required for conventional mortgages when the interested buyer puts down less than 20%. Private mortgage insurance is purchased by the mortgage lender and helps protect the lender in case the buyer doesn’t make their payments.

What is a preferred lender?

During a real estate transaction, a real estate agent or realtor might recommend a lender to a buyer, referred to as a preferred lender. When working with financial and real estate professionals to purchase a home, they will often know who is especially skilled and proficient. The intention of working with a preferred lender is to ensure a smooth process from beginning to end. 

What is an interest rate?

An interest rate is the amount a lender charges a borrower and is a percentage of the principal loan amount. The interest rate on a mortgage loan is typically noted on an annual basis, known as the annual percentage rate.  

What is a balloon payment?

A balloon payment is another piece of real estate terminology you might encounter. This refers to a financing option where a large lump sum is paid at any time during the mortgage term. We tend to see this in commercial real estate, and typically the large one-time payment is made at the end of the term. 

What is an adjustable rate mortgage? (ARM)

An adjustable rate mortgage is a loan with an interest rate that can increase or decrease over a period of time. A mortgage lender may offer an initial period of time where the loan has a fixed interest rate, which is typically one year, three years, five years, seven years, or 10 years. After this period of time, the rate will adjust up and down according to a preset schedule, such as once a year.  The popularity of ARMs can vary depending on a number of factors, namely the current mortgage interest rate. 

What is property tax?

Property tax is the tax homeowners pay to the IRS on their home. Property tax is determined by a number of factors, like the home’s purchase price, assessed value price, and age. Property tax varies by state, so it’s best to become familiar with the property tax in the area you are looking to purchase. Remember to factor in the property tax amount to your monthly payments and expenses. 

What is capital gains tax?

Capital gains tax is the tax on the profit of the sale of an asset. The most common sources of capital gains tax are from the sale of real estate, property, stocks, and bonds. For example, if you purchase a home at $100,000 and then sell it for $200,000, the profit of $100,000 would be taxed that year at the current capital gains tax rate. 

What is alternative minimum tax? (AMT)

Alternative minimum tax is a different way of calculating income tax. The AMT began as a way to ensure that wealthy taxpayers weren’t using deductions to avoid paying income tax. The AMT’s purpose is to ensure that every taxpayer pays a minimum amount of tax. So, if you’re subjected to the AMT you will calculate your taxes using two methods. If the AMT results in a higher tax bill, you’ll pay the higher tax. 

What are liens? 

Liens refer to a legal claim on assets that allows the mortgage broker to take ownership of a property if the debts are not paid. By law, a lien is required to appear in public record and will attach to any real property or personal property that the homebuyer owns or may own in the future. 

Meanwhile, a clear title, also known as a clean title, is one that is free of liens. Before issuing a title insurance policy, a title company will search public records to determine if a property has any liens on it. 

Similarly, a chain of title lists the owners of a home. 

What is depreciation?

Depreciation is the decline in value to an asset over time. A prime example is when purchasing a new vehicle from a dealership and the moment that vehicle (asset) is driven off the lot, it depreciates in value. The good news with real estate and homeownership is that assets do not depreciate nearly as drastically—typically, the value goes up.  

What is foreclosure?

Foreclosure is a legal process that allows a mortgage lender to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Foreclosure acts as an element of protection for the lender in the event that the property owner or borrower can’t fulfill the loan agreement and gives the mortgage lender the power to repossess the home.

What is a loan contingency?

A loan contingency is a clause in a real estate contract that allows the potential buyer to withdraw their interest in purchasing a home if they can’t secure a mortgage. This is a way to protect both the buyer and the seller during the transaction period and happens before the sale of a home is approved.

What is amortization?

Amortization is an accounting principle used to periodically lower the value of a loan or an intangible asset over time. Simply put, it’s the process of spreading out a loan into a series of fixed payments so the loan is paid off by the end of the payment schedule. 

What is refinancing?

Refinancing is the restructuring or replacement of an existing mortgage agreement with a new mortgage that has more favorable terms. When a buyer opts to refinance, this can change the interest rate or terms of their current mortgage. 

What is a fiduciary?

A fiduciary is a person who holds a legal or ethical relationship of trust with their clients. They’re legally required to act in your best interest, not the bank’s. 

Whether You’re Buying or Selling, Aalto Is There to Help

Whether you’re listing your home or starting your journey to homeownership, it’s helpful to acquaint yourself with real estate terms you might encounter. We’ve covered finance-specific real estate terminology here, but if you want an even more in-depth glossary, check out our full library of real estate terms for buyers. From understanding what escrow means to how to determine the value of a property to making a counter offer, our goal is to further equip you to nab your dream home.

With your newfound knowledge, you’ll be ready to get hands-on with your home purchase. At Aalto, we link buyers and sellers directly together through our self-service real estate platform.

By working with Aalto, you won’t need to pay the extra cost to hire a listing agent or a buyer’s agent or try to navigate the real estate terminology on your own. Instead of hiring a real estate agent, buyers and sellers get help from Aalto to navigate the real estate process on their own. 

If you have questions about closing costs or how much to put towards a down payment, our licensed professionals are available to answer all of your questions. Plus, you’ll have someone to help guide you through real estate terminology.

‍Sign up on Aalto today and start the process of finding your dream home.