Navigating the real estate market can be daunting, especially if you’re new to the process. When researching how to buy a home or comparing mortgage options, you might feel overwhelmed by the industry-specific jargon. To help you on your journey to homeownership, we’ve put together a list of eight real estate terms you need to know.

1. Debt-to-income ratio

The debt-to-income ratio (DTI) is a measure that lenders use to determine a borrower’s ability to manage monthly payments and repay debts. Lenders calculate this ratio by dividing total monthly debt payments by gross monthly income.

A lower DTI indicates a more favorable financial situation for taking on new debt. While acceptable DTI limits vary by loan type and lender, keeping this ratio low can improve your borrowing options and overall affordability.

2. Fixed-rate mortgage

A fixed-rate mortgage is a home loan with an interest rate that remains the same for the entire term. This type of mortgage offers stability and predictability, as your monthly payments will not change over time.

With a fixed-rate mortgage, you can expect:

• A consistent interest rate for the life of the loan
• Predictable monthly principal and interest payments
• Easier long-term budgeting and financial planning

It’s an excellent choice for buyers who plan to stay in their homes for a long period and prefer a consistent payment schedule. Learn more about fixed-rate mortgages.

3. Adjustable-rate mortgage

In contrast, an adjustable-rate mortgage (ARM) has an interest rate that may change periodically over the loan period. Typically, ARMs offer lower interest rates and lower monthly payments for an initial period, then rates adjust at preset intervals based on market conditions and the terms of your loan agreement.

For example, a 5/1 ARM has a fixed rate for five years, and rates adjust annually each subsequent year. Learn more about ARMs.

4. Principal

The principal is the amount a person borrows to buy a home, excluding interest. Over time, as you make mortgage payments, the principal balance decreases.

5. Amortization

Amortization is a mouthful, but it’s an important term to understand. (Learn to pronounce it here.) Amortization refers to the process of gradually repaying your loan through regular payments. Each payment covers a portion of the interest and principal, with the balance decreasing over time per the terms of your loan agreement.

Here’s what that looks like in real life: When you first start making mortgage payments, a larger share of your payment typically goes toward interest, and a smaller portion goes toward the principal. As your loan balance shrinks over time, that shifts — more of each payment goes toward paying down the principal and less goes toward interest.

Your amortization schedule can help you see how much of your payment goes toward paying interest versus the principal — and how your home equity builds over time.

6. Equity

Equity represents the portion of the property that you own, which you can calculate by subtracting the outstanding mortgage balance from your home’s current market value.

Why equity matters: Building equity is a significant benefit of homeownership because you can borrow against your equity with a Home Equity Line of Credit or a Home Equity Loan, put equity to work paying down debt, or cash out your equity upon selling the property.

7. Deed

A deed is a legal document that transfers property ownership from one party to another. It includes a property description and identifies the grantor (seller) and grantee (buyer).

8. Earnest money

Earnest money is a deposit a buyer makes to demonstrate their serious intent to purchase a property. This money is usually held in escrow and applied toward the down payment or closing costs. If the deal falls through due to a cause on the side of the buyer, the seller can keep the earnest money as compensation.

Bringing it all home

Understanding these terms will empower you to make informed decisions as a prospective homebuyer. (Next, learn 10 more real estate terms you should know.)

Send us a message when you’re ready to get started on your homebuying journey. We’d love to talk with you about how we can finance your dream home.

MESSAGE OUR REAL ESTATE TEAM

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