Disclaimer: The definitions of these terms are a combination of the actual definition and how I perceive them through my own words to make them less intimidating to readers without full knowledge of the business of real estate. I still encourage you to educate yourself on the full definition of these terms so you get a full understanding.
Real Estate is a business unbeknownst to readers that are not into real estate or don’t have any knowledge/experience in dealing with real estate. I did not go to school for real estate nor did I decide to go and get my real estate agent license. I learned real estate the old fashion way, by reading books (I have never been a huge reader and now I have goals to read books for the year)! So far in my real estate journey, there have been terms that I did not understand at first until I started reading and looking for houses (always ask questions)! I also did a lot of learning on the fly or on the spot, which might not be the best way of learning, but it was and it is effective for me. If you see how I think on a daily basis you’d think I’m crazy because one second I’ll be calculating the age I’ll retire if I save x amount of dollars then the next second I’ll be randomly calculating how many licks it’ll take to get to the center of a tootsie pop. My mind wanders A LOT and I can retain a lot of information regarding investing and I can get off track on topics easily; I am just weird in my own way.
ANYWAY (got a little off track there)….for you, the reader, you might operate different from me and might want to at least be knowledgeable in some shape or form before getting into real estate, right? You don’t want to jump in blind or fear you’ll sound stupid when you ask questions, right? Or you feel shy and feel intimated by asking questions? Those are all valid reasons so fear no more! I will be talking a lot about real estate and investing in this blog and I want you to be able to understand what I’m talking about without having to open another tab to google a real estate/investing term that you’re not sure of (that could easily distract you from reading the rest of the blog post)! I will first tackle real estate terms, then in the future, I will tackle investing terms!
So here is a list of common real estate terms that you will see on this blog and in your own life if you choose to get into real estate investing, buying/selling a home:
We hear this term a lot but what is a mortgage really? It’s a loan, typically offered by a bank/lender for people like you and me to purchase real estate. We ask for a certain amount to borrow and can be approved for the loan with certain conditions (down payments, interest rate, life of the loan). The bank loans us the money and we pay the money back over time with interest.
White Tee Jay is about to buy a home for $500,000 but he only has $100,000 in cash. He goes to his local bank to apply for a mortgage on the home. White Tee Jay gets approved for a $400,000 mortgage loan. He uses the $100,000 + the mortgage from the bank to buy the home. The mortgage loan will be paid monthly within 30 years with an interest rate of 3% annually. The home will be the bank’s collateral until the mortgage is fully paid off.
Mortgages are loans to buy real estate and they come with fixed terms for the loan and we are obligated to pay off the loan within the time frame we choose.
Refinance is a common method used in real estate and anything dealing with loans in general. In real estate, refinance is used to replace an existing mortgage loan, with a new mortgage loan. The sequence would be: apply for a mortgage refinance, get approved for the new mortgage, use the funds from the new mortgage to pay off the old mortgage, then start paying off the new mortgage. But why refinance? Sometimes lower interests are available, lower monthly payments, etc.
Refinance to me is simply: out with the old, payoff the new.
- Down Payment
Down payment is practically an initial payment when taking out a loan. Think of it as “up front” money or an incentive to the bank/lender so they can give you more money.
Same example from the mortgage section:
White Tee Jay has $100,000 but wants a $500,000 house. When he went to the bank, he said he will put down $100,000 so he can get $400,000 to complete the purchase of the home.
White Tee Jay’s “down payment” is $100,000. Down payments can vary in amount, you will see this a lot in real estate, especially if you plan on getting a mortgage.
- Interest Rates
Mortgages, car loans, student loans, credit cards, they all have something in common: interest rates! If you are a bank/lender, you wouldn’t just lend money out for free or without something in return right? That is what interest is. Interest rates can fluctuate and can really take a bite out of your bank account if you don’t pay off your loans right away. Interest rates can vary from 3% nowadays to 12% depending on who you’re borrowing money from. Credit cards, don’t even get me started…I’ll post about that later! Always be aware of the interest rates on the things you invest in or buy!
No no we’re not talking about admiration for someone. Although in real estate, when a property appreciates, the owners do “appreciate” that dollar price! *ba dum tssss*
Anyway so in real estate, properties tend to appreciate in value over time, which means the value of that property increases. Hence the term, appreciation.
White Tee Jay’s house in 2019 was worth $450,000. In 2020, the house appreciated to $500,000. The house appreciated in value by $50,000.
That is the basic definition of appreciation in real estate. Inversely, properties can decrease in value, which is called depreciation.
- Under Contract
This term is used in real estate after an offer letter placed by the buyer on a home has been accepted and signed by the seller! This means, we got a deal…under these conditions! When a seller accepts a buyer’s offer on a home they are selling, this kicks off the whole process of the real estate transaction. To learn more on the whole under contract process, please refer to Let’s Talk Real Estate: My First Real Estate Deal to see my first full experience on buying a home.
Foreclosures occur when the person who is supposed to be paying the bank monthly mortgage payments fails to pay. The bank will then foreclose the house and the home will be owned by the bank. This process isn’t an overnight process and it’s unlikely the person who owns the home will be rendered homeless or move out right away. There is a whole process to foreclosures.
Equity = ownership of an asset of value
Do you own a $12,000 car that you paid $12,000 for? That means you have $12,000 worth of equity in that car (if the value of the car hasn’t depreciated yet). Do you own a $500,000 home, but have only paid $250,000? That means you have $250,000 worth of equity on the home. These are examples of equity. In real estate, equity is a powerful tool that can help scale a portfolio and can help general massive amounts of wealth.
So if you own something (or have paid at least part of it), you also got some equity in what you own!
Have you ever borrowed money to try to make more money? If you have, you are using what is called leverage in real estate and investing! Leveraging is an investment strategy that is commonly used for investors to generate profit/create wealth with borrowed money (which is commonly referred to as debt). That means nothing out of their own pocket..if done correctly!
White Tee Jay decides to buy an investment property but doesn’t have the cash for it. He decides to go to a private lender (there are real professional private lenders out there that will loan you money) that will loan money to help fund the down payment on the house. After borrowing the money from the private lender, White Tee Jay is now indebted to the lender for the money that was borrowed. White Tee Jay uses the money from the private lender to now help finance an investment property. Now, White Tee Jay has an investment property and is hopefully able to pay off all his debt each month! This is obviously not a real example (although it is possible and a lot of people do this), but the point of leveraging is to make more money with borrowed money. If you are able to do so, you could end up with a house without spending a dime of your own paycheck!
I hope you’ve learned a little bit more of real estate with this post and I hope you don’t have to google these terms in future posts! Real Estate is a huge business and there is so much I have to learn and so much you can learn! I love to keep myself up to date and I always find myself trying to learn new things within real estate. I hope this helps, just a little! And if my definitions aren’t as clear or wrong, don’t hesitate to correct me, I love learning!