One of the biggest financial decisions that an average person will ever make in their life is to buy a house. Homeownership is among the list of traditional life milestones valued greatly by society, along with starting a business, building a family, or buying a car.
Despite this being a prevalent life goal, homeownership is not something that is taught in school. There are no manuals on how people can start saving up for their future homes or what steps they must take to begin the process. They would have to learn these things on their own, with the help of professionals.
Unfortunately, like most industries, both the financial and real estate worlds function in their own ways. They are also characterized by having their own languages or jargon that only they can immediately understand, which can alienate those who aren’t as well versed as the niche professionals.
Hearing incomprehensible terms can make it difficult for aspiring homeowners to keep up with what’s being discussed with them during the homebuying process. If you belong to the population of people struggling to keep up with the jargon, here is a quick explanation of four common terms that you may hear:
Most homeowners finance their house by applying for a loan so that they can afford the big expenditure despite their limited budgets. Usually, these loans come with a set of terms that are agreed upon once the loan application is approved. This can include the repayment schedule and interest rates.
After a few months into your loan payments, you might qualify for the opportunity to refinance. The term “refinance” here means that you can replace your current loan with another one that has better interest rates or more favorable terms, which can benefit you in the long run.
So if you were to consider refinancing a mortgage, you can take advantage of lower monthly payments or even consolidate your debt if you have any. Another benefit that you can enjoy is shortening the terms of your loan. For instance, you can replace a 30-year loan with adjustable interest rates with a 15-year fixed-rate loan.
When applying for a secured or unsecured loan from a lender, they might ask you what you can put down as collateral. The term “collateral” here refers to the piece of property that you can pledge to your lender in exchange for their trust.
Your collateral property will serve as a guarantee that you will repay what you borrow within the agreed-upon period. This is because if you fail to do your end of the bargain, your lender can seize your collateral property and sell it to cover their losses.
Having bad credit is like a nightmare for financially literate individuals, which is why they work hard to maintain a good score. The credit scoring system acts as a metric for lending institutions to gauge whether a potential borrower is worthy of being approved for a loan.
So in this scenario, if you have “bad credit,” it means that you have a credit score of 580 or lower, which can be attributed to a habit of making late payments. Individuals with bad credit are seen as risky borrowers because their credit history shows that they may not pay their loans on time.
As a direct consequence of having bad credit, you might have a hard time finding a lender willing to trust in your ability to make timely payments. Fortunately, a bad credit score is not permanent, and you can put in the work to improve your score in the future.
Once you’re finally a homeowner, you might hear the word “home equity” at least a few times. The term “home equity” here refers to the real property’s current market value. Or, to put it simply, it’s the portion of your home’s value that you actually own at any given time.
The equity in your house will vary from time to time because it’s directly affected by your loan repayments and the fluctuations in the market that can impact your property’s value. It’s important to know how much equity you have in your home because you can use it for future loans.
So the more payments you make on your house, the higher your equity becomes. Once you have enough home equity, you can use it as collateral when applying for a home equity loan or a home equity line of credit (HELOC).
You don’t have to feel bad just because there are terms that you can’t immediately grasp or put into context. There will always be situations where you will feel alienated in conversations, but what matters is that you take it as a learning opportunity to grow and widen your knowledge through your available resources.