Decoding the Lingo: 8 Important Real Estate Terms

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

1. Debt-to-income ratio (DTI)

The debt-to-income ratio (DTI) is a measure 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, such as a mortgage. (If you’re a physician, veterinarian, attorney or other selected professional, consider the Professional Home Loan, designed to help you overcome the hurdle of higher student loan debt.)

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. 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 (ARM)

In contrast to a fixed-rate mortgage, an adjustable-rate mortgage (ARM) has an interest rate that may change periodically at designated times throughout the loan. Typically, ARMs provide the opportunity for lower interest rates and lower monthly payments for an initial period, and then, rates adjust based on market conditions at preset intervals. For example, a 5/1 ARM has a fixed rate for five years, and then rates adjust annually each subsequent year. Learn more about ARMs.

4. Principal

The principal is the money a person borrows to buy a home, not including 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. Understanding your amortization schedule can help you see how much of your payment goes toward interest versus paying down the principal.

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. Building equity is a significant benefit of homeownership, because you can borrow against your equity with a Home Equity Line of Credit (HELOC) or 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 the buyer’s fault, the seller may keep the earnest money as compensation.

Understanding these terms will empower you to make informed decisions and communicate effectively with real estate professionals. (Next, learn 10 more real estate terms you should know.)

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Mortgages are subject to credit approval. Grow Financial mortgage loans are valid for the purchase or refinance of owner-occupied residential properties in the states of Florida, South Carolina, North Carolina, Georgia, Alabama and Tennessee including single-family detached, condominiums and townhomes. Not valid for the purchase of investment properties. Grow Financial mortgage loan rates are updated daily and available at growfinancial.org.

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