Here is part II in our series of investing terms. In this part we move into the purchasing process, helping you understand the acronyms you may come across. Understanding these terms is important for a this part investing. Of course, if you have any questions, please do not hesitate to reach out to one of our agents!

Real Estate Terms: Buying & Carrying Debt

Adjustable-rate mortgage: A mortgage where the rate varies over the course of the loan based on the benchmark interest rate that fluctuates due to market conditions

Fixed-rate mortgage: A mortgage where the rate remains consistent over the life of the loan

Amortization: When an owner pays off a portion of the principal and interest in different amounts each month, allowing the owner to build equity earlier in the repayment process

Escrow: A third-party financial account that temporarily holds the money a buyer will pay for a property until all negotiations and conditions are agreed upon between the buyer and seller; it is also used by the lender to make mortgage payments, taxes, and insurance on behalf of the buyer to show the funds are readily available

Interest: The cost for borrowing money for a mortgage, accrued at a rate set by the lender and paid off over the life of the loan in addition to the principal amount borrowed; investors can write off interest as a business expense on their tax returns

Proof of funds: A statement from a financial institution that the buyer has enough funds to proceed with an offer to the seller

Underwriting: Determining the eligibility of a borrower by applying formal qualitative and quantitative criteria

Real estate owned (REO): Property that was foreclosed and is now in possession of the bank that was the mortgage holder; investors can anticipate that the property property may not be in the best of condition, but REO properties are usually sold below market value, they can be a more appealing purchase

Short sale: A type of sales transaction where the property sells for less than what is owed on a mortgage and the lenders issue a formal letter consenting to release the lien for an amount less than what is owed

Real estate broker vs. realtorA real estate broker is an independent professional with a license to help people both buy and sell property; a realtor is an individual who serves as an agent in real estate sales, who is also a member of the trade association National Association of Realtors—all realtors are real estate brokers, but not all real estate brokers are realtors