Top 10 Basic Terms for Real Estate Loans

Everyone knows that you should never sign on the dotted line without reading the contract.

This same term applies to loans. Signing a loan without knowing the terms and what everything means can be detrimental to your finances, credit and future investments. Before you sign on the dotted line, make sure that you know these basic terms and how they will apply to you. This is not meant to be a comprehensive list of real estate loan concepts, but only an introductory guide. Please be sure to consult with your trusted lender and real estate lawyer to ensure you understand the terms of the contract you are signing.

 

1. Interest rate. The interest rate is the percentage of your loan that is added on every month. The percentage will vary according to the economy and will make a difference in your payments.

2. Fixed Rate. A fixed rate will be an interest rate that stays at the same percentage throughout the entire period of your loan.

3. Variable Rate. A variable rate will change according to the economy and the charts that are stating what the rates should be for interest. A variable rate usually changes every year and adjusts according to a specific given range of percentages.

4. Principal. The principal is what you will be paying on your actual house. Whatever you pay on your principal is what you will see in the end as your investment. Let’s say you are buying a home for $300,000 and put 5% down ($15,000). Your loan would be $285,000 at 4.5% per year (for this example) for a 30 year term. Your monthly payment would be $1,444.05 (excluding property taxes and insurance). The total amount of your first payment that would go towards principal would be $375 with $1,068.75 going towards interest, and will gradually decrease as your principal decreases. If you only make the minimum payment every month, you would end up paying approximately $519,858 at the end of the 30 year term, out of which $234,858 would be interest.

5. Escrow. This is similar to a savings account of your loan. Whatever you put in escrow will accumulate without paying directly into the loan. At the end of the term you can use it to finish paying off the loan or to invest in another loan. Escrow accounts are also used as intermediaries (third party) between buyers and sellers to ensure that payments are being recorded and performed per the conditions agreed to in the purchase contract. A very common use of escrow accounts is to pay property taxes and insurance.

6. Title. A title will be what you get to your home after it is officially yours, stating that the property belongs to you.

7. Deed. A deed will most often be used as a title for a commercial area. Instead of giving ownership it shows that the property is leased to the one who is using it as a business.

8. Home Equity Loan. A Home Equity Loan, Home Equity Line of Credit (HELOC) or second mortgage are all similar type of loans (with a few variations) that you can get for the equity you have on your home. Terms for this type of loans differ by financial institution, and are usually very convenient (low interest rate) since they are secured by your property. This helps if you want to consolidate loans or invest more into the property.

9. Appraisal. After an inspection of the home is made, an appraisal will be made. This will be an estimated value of what the home is worth.

10. Equity. This will be the actual amount of the property that you own. Most likely, it is what is being paid off of your principal amount. If your home is worth $300,000 and you owe $200,000 to the bank, your equity is $100,000.

As mentioned above, this is not meant to be a comprehensive list of real estate loan concepts, but only an introductory guide. Once you feel comfortable with these basic terms, you will be able to expand on your knowledge and dive into more specific and complex terms. We hope these basic definitions will help you in making the right decision for the type of loan that you want.

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