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If you’re looking to buy your first home or your first investment property, there’s a lot of terms thrown around during the process that you may be unfamiliar with. Here are six of the most common real estate terms you may not know.

Amortization is a way of paying off your fixed-rate mortgage that combines the principal and the interest. This equalizes the monthly cost of the mortgage and makes your payments predictable. During the beginning of paying back your mortgage, the interest payment is high while the principle is low, and at the end of the loan, the interest payment is low while the principle is high.  This characteristic provides favor to a lender who will receive the majority of his interest payments early in the loan process. The borrower will stand gain the most by holding the property as long as possible toward the end of the term when the monthly payments will be more principal than interest.

The Comparative Market Analysis, or CMA, is a report of similar homes in the area that were sold recently or are on the market right now. These reports can be useful when to determine an appropriate value for your home.  Real Estate Broker’s perform these and they are based on the values of similarly selling properties.

Earnest money deposit
The earnest money deposit is money provided along with your offer on a home in a show of good faith. Usually, the amount equates to one to two percent of the purchase price of the home. If the sale is successful, then the deposit goes towards the down payment. If the sale doesn’t go through, then the money is given back to the buyer unless the fault of the sale not going through is the fault of the buyer.  In this case the buyer may stand to forfeit all or a portion of her deposit that corresponds to the seller’s actual loss as a result of the buyer’s unwillingness to execute the contract of sale. In many contracts the attorneys and realtors add contingency clauses for the buyer which absolve buyer liability when certain required conditions beyond their control do not take place such as mortgage approval.

Escrow is a third party that is hired to handle the property transaction, the exchange of money and any related documents. Escrow only comes into play after both parties have reached an agreement. The escrow officer handles the transfer of the buyer’s loan documents and property taxes, and they also work with the lender for the buyer to ensure the title doesn’t have any liens on it before ownership is transferred.  

Escrow Payments

In most residential transactions involving a mortgage the lender requires additional payments for real estate taxes and insurance known as escrow payments.  The lender will acts as the escrow agent collecting the money directly from the borrower along with their mortgage payment. If the purchase is made without a mortgage, the buyer generally has the option of whether to use an escrow officer or make the tax and insurance payments or make them independently herself.

Multiple Listing Service
An MLS, or Multiple Listing Service, is an extensive database that hosts and distributes information to members about homes on the market, under contract or sold. The data in the service is then used to populate home listing sites. The general public is not eligible to join.

Private Mortgage Insurance
Private Mortgage Insurance, or PMI, allows a home buyer to put a down payment of less than 20 percent of the home price when utilizing a conventional mortgage. With PMI, the buyer pays a premium to protect the lender if they are unable to pay back their mortgage. Once the buyer has 20 percent equity in the home, the insurance is discontinued.  Using non-conventional mortgages such as FHA and VA the buyer can avoid PMI (however similar payments are required to the FHA and VA in the form of Mortgage Insurance Premiums and VA funding fees.