Financial literacy is critical, both for agents and for their clients. As such, we’ve put together a little glossary of important terms that’ll make it easier to explain the financial aspects of homebuying and selling to your clients in a digestible format. 

On the heels of our first-ever Agent Appreciation month, Inman is leaping into February with our Residential Finance theme month. Join us as we investigate how buying and selling a home is changing, from companies backing consumers in new ways to integrated services that handle the entire transaction.

Financial literacy is critical, both for agents and for their clients. As such, Inman has put together a little glossary of important terms that’ll make it easier to explain the financial aspects of homebuying and selling to your clients in a digestible format.

Amortization

Amortization is the schedule of your monthly mortgage loan payments. (Some other loans, such as credit cards, also use an amortization schedule to show the breakdown of payments.) An amortization schedule shows you how much of your monthly mortgage payment goes to interest and how much to principal. Read more here.

Default

A “default” occurs when a borrower does not make his or her mortgage loan payment and falls behind. When this happens, he or she risks the home heading into the foreclosure process. Usually, the foreclosure process is started within thirty days after the due date is not met. When a mortgage loan goes into default, the agency that is the loan holder has the option of taking over the property. Many people do not realize that defaulting on the loan can result in losing their property. Even if the property is not lost during a foreclosure, having a default on your credit report will lower your credit score. Read more.

Depreciation

If you have ever owned a large-ticket item such as a home or even an automobile, you have probably heard the term “depreciation.” Depreciation is defined as a decrease in the value of your property over time. There are many things that are figured into the value of your home. These will definitely include the current markets, the amount of wear and tear on the home and any changes in the neighborhood. The fair-market value will play into the depreciation. Read more. 

Down payment

A down payment is the amount of money that a buyer has saved to help fund the purchase of a home. This amount is usually given as a percentage of the total of the home’s purchase price. For example, a common down payment amount is 20 percent, which means the buyer will be paying 20 percent of the total purchase price upfront. Read more. 

Equity

Equity is the market value of real property, less the amount of any liens that may exist. It could also be explained as the financial interest that a homeowner has in a property. A more in-depth explanation of home equity can be outlined as the percentage of your home that you own. This is the part of the home that you have an interest in. You might consider yourself a homeowner — but more than likely, you do not own the property free and clear. Read more.

Escrow

Escrow is a term that homebuyers, sellers and real estate agents should be very familiar with and have a complete understanding of before buying or selling a home. Escrow is a term that refers to a third party hired to handle the property transaction, the exchange of money and any related documents. Escrow comes into play once both parties have reached a mutual agreement or offer. Read more.

Fiduciary

“Fiduciary” is a term that refers to a legal relationship that is confidential between two parties. This relationship gives one party the right to act and make important decisions for the other party. In the world of real estate, the real estate agent and his or her clients (buyers or sellers) participate in a fiduciary relationship. The two parties enter into a signed agreement in which the client puts trust in the real estate agent to work with their best interests in mind. The duties that are required in a fiduciary relationship will vary from state to state, but all require confidentiality. Read more.

Foreclosure

Foreclosure is the legal process by which the right of homeownership is transferred from the person or persons who occupy the home to the bank or lender who hold the mortgage loan. The foreclosure process will usually begin when homeowners stop making payments on mortgage loans. Lenders will begin the foreclosure process after two or three months of missed payments. Read more.

Interest

When you receive a loan of any kind, it is more than likely you will pay interest. The term “interest” can be defined as the cost of borrowing money and is usually expressed as a yearly percentage that is paid as part of your monthly loan payment. Mortgage loans come with an interest rate. Interest rates change on a daily basis depending on what the current market looks like. However, once a borrower has “locked in” an interest rate on a fixed-rate mortgage loan, that interest rate will not change. Read more.

Lien

A “lien” is a simple legal term that claims the ownership of the property as listed on the title of the home. It means that the home is being held as collateral until a certain debt is paid. The most common types of lienholders are the mortgage companies, but other examples can include utility companies, or even contractors. Basically, if the borrower owes money to anyone, that person or company can file a lien against the property. When it comes to selling a property that has a lien or liens placed against it, the seller and the purchaser will find that it is next to impossible to complete the transaction until the liens have been cleared. legally be sold due to it being collateral for other debts owed. Read more.

Per diem

“Per diem” is a Latin term that means “per day.” When someone enters into a contract on a home, there is a date entered into the contact, which is known as a closing date. Per diem charges may occur if the loan is not approved for some reason by the date that the loan was scheduled to be completed. During closing, these charges will be payable to the lender and will appear on the Closing Disclosure. Read more.

Real Estate Owned (REO)

The term “REO” stands for “real estate-owned home” and commonly grouped together with “bank owned.” These are homes that have been foreclosed on by banks or lenders. The banks or lenders now own and wish to sell the home. Read more.

Refinance

If you are a homeowner with a mortgage loan, you have probably heard the term refinance tossed around during conversations. A refinance is a process that involves obtaining a new loan to pay off a current one. Usually with a refinance loan, the goal is to have a better interest rate and better terms than the current loan. Read more.

Short sale

A short sale occurs when a home is sold but the amount of the sale is not enough to cover what is owed on the seller’s mortgage loan, as well as closing costs, taxes and the commission owed to the real estate agent. In a short sale, the seller is not willing to make up the difference. Oftentimes, a short sale is happening because the owners are behind on their mortgage payments and are heading down the trail to foreclosure. Read more.

What did we miss? Share in the comments section below.

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