Before diving deep into any new venture, you must equip yourself with as much knowledge as possible. Your success hinges on how much you know. And nothing could help you start your journey as a first time home buyer more than knowing the terms and definitions in the industry. Continuing the glossary of words series, David Sidoni takes us to the terms that start with the letter T. From taxes to termite inspection to the treasury index, he covers the essential words you need to know as a first time home buyer. So tune in for the first part of the “T” terms!
First Time Home Buyer Terms And Definitions From A-Z – “T” Part 1
Glossary Of Words You Need To Know As A First Time Home Buyer
Once again, it’s time for another installment of all the real estate terms and definitions you need to know, the letter T. Let’s do it.
What is happening my How to Buy a Homies? It’s time for T. It’s like tea time in England. As Ted Lasso would say when it comes to tea, when they ask him how he takes his tea, I say what he says, “I usually tell him to take it right back to the counter because someone has made a horrible mistake.” We are going to get going for all things the first-time home buyers should know about the letter T.
Our first T word is Taxes and insurance. Now, I cheated there because instead of saying the T in the PITI, I put Taxes and Insurance the TI in the PITI together as though they were combined, and that is for a very specific reason. If you don’t know what PITI is, go back to the P episodes. Those are 136, 137, and 138 but I will tell you anyway. It’s Principle, Interest, Taxes, and Insurance.
In this episode, we are talking about the T and the I, the Taxes and Insurance, because as you move forward in your monthly home calculations on that payment, you are going to be constantly working on your PITI. It’s the monthly number that is going to replace your largest monthly expense, your rent payment. That’s the PITI that makes up your mortgage.
The P and the I are the Principle and the Interest on your loan payment, so those go together. We take your T and your I. We put those together, Taxes and Insurance. They should be thought of together with the PITI but also separately as well. The reason for that is that they can be, and they usually are what we call impounded by your lender so that your payments are then divided up into twelve monthly payments as opposed to paying it at the time that your taxes and insurance are. Usually, twice a year, they are going to ask for it.
Sometimes it’s different if you are dealing with different tax codes in your different areas. If you have your lender pay for it, then that’s called impounding it. Now, you don’t have to impound them if you don’t want to. That means you would only pay your principal and your interest. Meanwhile, your taxes and your insurance would be paid by you whenever they are due. Usually, about every six months but it could be different where you are.
That means you are going to be in charge of putting that extra money aside every month and making sure that you pay that correctly. Most people let their lender open an escrow account for them, then you pre-fund that account with your closing costs and pay into it monthly with the TI in your PITI. The lender will make this usually biannual payment for you or whenever your local taxes or insurance are due.
Now, the reason they do this is because a loan has to be insured and up to date on its taxes or there’s a chance that they can default on the loan. They don’t want to do that. The bank sets this up for you because they would rather protect their asset. Always knowing that they have enough money in that escrow account. When it comes to calculating how much you are going to pay for taxes on your home, that depends on what state, what county, and what city you are in.
As usual, you are going to have a unicorn lender to help you figure out exactly what the taxes are in your area. Moving on to our next T and we will start this with another one of Ted Lasso’s thoughts on drinking tea. I always figured that tea would taste like hot brown water, and do you know what? I was right. This is horrible. I love Ted Lasso and hate tea. Sorry, peeps.
Our next T is Tenancy in common. This is one way to take title or ownership of the home. It describes a type of joint ownership of the property where all parties only have property but you can own it in different ratios. It doesn’t have to be 50/50 if there are two of you or 33/33/33 if there are three of you. You can split it up 60/40/ or 50/25/25.
The other big thing about tenancy in common is that it is not a right to survivorship. In some other ones, the survivorship owners will end up getting the remainder of the property should someone become unalive or pass away. One of the other things with a tendency in common is not a right to survivorship ownership. What that means is that the surviving owners get to split up the deceased un alive person’s property interest.
Instead, in this case, the person who passes away their ownership interest or percentage because remember, it could be 25% or 40% or 60% however you split it up. It falls into that person’s estate, and that means it’s going to be defined by their will or their governing law. Makes sense? This is one that people ask you about a lot but we will go deep into the title later.
More T coming at you, and another Ted Lasso thought, “Tea is horrible. It’s absolute garbage water. I don’t know why you all do that.” The next one is the Termite Inspection and Termite Report. Google tells us that termites are small, pale, soft-bodied insects that feed on wood. Who would’ve thought? They can be highly destructive. Now, when you are buying a home, you are going to see something called the WDI. That’s the Wood Destroying Insect.
It sounds like a Marvel movie but it’s also known as the Termite Report. Not just a WDI, Wood Destroying Insect Report. What this does is it will include a diagram of the property and locations of active or previous active termite infestations. In California, we divide it up. We call it sections 1 and 2 in the termite report. In other parts of the US and Canada, it might be called something else.
Section one is an important part for you to realize because that means where you actively have an infestation of termites. That would be the area that’s recommended that you get treated pretty darn quickly. You can treat those areas by either spraying the area, doing a local treatment or simply replacing and removing the wood. Worst-case scenario, you need to do a full-home fumigation. Tent time is like a circus.
That’s the important part for you to know about. In California, we call areas that are not active infestation but could be a problem in the future. They are going to call that section two. In many parts of the country, a home has to be inspected for termites before it can be sold. It’s supposedly that way in California but you can waive it if you want to when you are a buyer.
The reason for this is, depending on market conditions, your lender could be a real stickler about this. They could want it to get done and could force you as the buyer to pay for it but if the market is right, your unicorn realtor might be able to help you by getting the seller to pay for it. Keep in mind, if it is required, that you need a termite clearance. They call it a complete section one done, finished, and fixed.
If this involves fumigation, this can get tricky because the home has to be packed up and fumigated. This means everyone has got to pack everything up and vacate the place. Who pays for that? That’s going to depend on the market conditions. That is a perfect segue for me. Time to give you a brief current market condition update.
I heard something amazing, and I need to pass it on to you because, for the past years, this termite cost has been passed on to you, the first-time home buyer. The sellers had the way upper hand in bidding frenzies, auctions going on, lines outside the door, and at the open house trying to buy every single listing. As I record this episode, it’s October 28th, 2022. On October 27th, I talked to someone who got some interesting news. I was talking to one of my favorite realtors in Las Vegas. He’s a super unicorn dude that I have known forever and, in fact, has been one of my favorite realtors to work with way before I even created the idea of the Unicorn Nation out there.
He reported to me that he was seeing a big shift in his local Las Vegas market. That’s very important because, in the many years that I have been studying the market, Las Vegas is usually an indicator. It’s the first one up and the first one down. Interesting fact. He reported a shift that’s happening right there. He was able to negotiate a $15,000 closing cost credit paid for by the seller. One of my readers was the beneficiary of that.
Another one of his listeners got a $10,000 closing credit from the seller to the buyer. In both these cases, they got the seller to take $10,000 or $15,000 directly from their profits from the sale of their home and credit it back to the buyer, who now ends up paying Jack cheese nada in closing costs. Remember when I told you that it wouldn’t be a crash but a slow-moving correction? This is a sign that correction is happening.
In even bigger news coming from a boy in Vegas, this unicorn realtor also had another listener who’s in one of those long-term contracts on a new build. If you don’t know about that, let me explain it to you. Sometimes when you buy a new house, it’s not built yet. It might take 3 to 9 months for you to be under contract while they build the home.
They require a deposit for you to hold that home. I know I told you back earlier in 2022 that some builders were taking that deposit but still canceling the contracts fully legally because the contract says all they have to do is return your deposit back to you, the poor, unsuspecting buyer who thinks you have a locked-in deal.
They can break the contract after they’ve cashed your deposit check and give it back to you. That’s all they owe you, with no explanation. If your deposit is $10,000 or $20,000 less than the difference that they could get in a new jacked-up price because while you have been waiting 3, 4 or 5 months, the prices have been going up. Guess what the builder is going to do?
They are going to give you your money back and sell it and make an even bigger profit for the thirsty public. You put your $20,000 down to secure the property but they give your $20,000 back and sell it for $50,000 more. As my video producer whispered over to me, that should be criminal. Preaching to the choir. I’m with you.
One of the big things, one of the reason why I have been saying for years, is always make sure that you have a unicorn realtor with you. Don’t just go straight through the builder. If you go straight through the builder, they are going to screw you because they are doing this to people that are represented by realtors and still figuring out a way to screw them. Imagine how much they are going to screw you if you have no protection at all.
Here’s the cool thing. In Las Vegas, the market is changing, and because this unicorn realtor knows that, he’s got to sell in a long build. The property isn’t set to be finished being built and closing until November. He went back and renegotiated with them now. He got $7,000 back from the lender. Now that buyer has that cheaper closing.
Trust me. We are going to be keeping an eye on Vegas because as they go, as I said, the rest of the country goes. I saw it in 2000, 2007, and 2011 and we are seeing it again now. Follow Vegas. You know where the market is going. Our next T is called Third-party origination. This term is not exclusive to real estate but when you hear it, in this case, it’s regarding a home purchase.
It usually means it’s the process in which a lender uses another party to completely or partially originate the process, underwrite clothes, and fund or package a mortgage loan, just so you know. Now, alphabetically the next T that we are doing in these terms and definitions would be Title and Title-related words. That’s a big chunk. I gave you a little bit earlier with the tendency in common but I’m going to skip through all the title things and do that in part two of the T, Ted Lasso hates tea episodes.
TIP: Total Interest Percentage
We will move on now and skip to the next term after the title. That’s the Total Interest Percentage, also known as TIP. That’s a disclosure that tells you how much interest you are going to pay over the life of your mortgage loan if you’ve never done this with your car or your credit card and figured out what you would pay on that if you paid minimums for the rest of your life.
I ask you, if you are on the treadmill, stop. If you are in the car, pull over. If you are doing dishes, put down anything that’s expensive because if you’ve never done this calculation before, you are going to trip out. If you pay the minimum, you are going to pay a lot more than the price tag. A $400,000 home paid off at the minimum monthly payments over 30 years at nowadays’ 7% interest rate. That’s going to cost you $958,035.57 because the total interest that you will pay at that 7% for 30 years if you pay the minimum is $558,035.57. That’s your total interest percentage if you take the whole 30 years and pay the minimum.
If you reduce the principle, these things change. As a matter of fact, if you make one extra payment of $2,000 a year, the total interest that you are going to pay over 30 years drops over $100,000 from $558,000 to $452,000. Don’t freak out about this because, remember, 30 years is a long time. You are going to have a billion different things that are going to change in your personal finances during this time. You are going to be able to do all sorts of things to reduce that interest payment, including, perhaps, selling the home in ten years and not having to pay that all off.
What if you do stay there for 30 years? Remember, your payment is fixed. While rents keep going up, in 10 or 15 years from now, I know you are going to freak out about this but it’s not going to seem as rough to make that big stretch payment that you pay now because wages will have increased. Your payment stays fixed. Anyone who pays the minimum payment for all 30 years, I don’t know who that anyone is. I don’t even understand how that situation goes because 30, 20 or 15 years from now, you are not in a situation to pay more on that fixed position.
I don’t quite understand how that’s going to work but the bottom line is you are probably not going to pay that because you are either going to refinance, sell the house or find a way to pay it off early as you go down the line. Don’t let this formula be the reason to stop you from renting because I guarantee you, guys, this. For most of you, the personal formula that you have for renting now and getting nothing in return is worse than all the other options that you are going to have when you own a home and have that fixed monthly payment for 30 years.
Our next T is Townhouse. This is a term that often gets confused in real estate. In California, a townhouse is like an artsy term. It’s a descriptive term. It is not a legal term at all. Most townhomes or townhouses in California are legally condominiums. Wherever you are in your area, be sure to check that townhome is a legal term because that will affect what loan you can get on it or if it’s a descriptive term like ranch style or tutor.
The next T is a Transfer Tax. Something you need to be aware of because this could affect your closing costs. It could be paid for by the buyer or the seller but some states or local tax areas have taxes that are payable when the title is passed from one owner to the other. Our next T is Treasury Index. This is a good one to reference when you are asking your mom and dad to help them with a down payment because they’ve heard the term treasury index but they might not know what it means.
Now the Treasury Index is an umbrella term for all the various guides that are based on the action of the US treasuries, such as Treasury Bills, Treasury Notes, and Treasury Bonds. Also known as T-Bills, T-notes, and T-bonds, which coincidentally enough are the crew names for three guys from my break dancing crew in the ‘80s. All are named Tony, T-Bills, and T-Note. T-bonds had a sweet head spin.
Why do you care about the treasury index? You are not doing Wall Street stuff. You are buying a house. It’s because the US Treasury indexes also use as a benchmark for mortgage interest rates. One of the general rules of thumb is if you are savvy, you can look at the ten-year treasury rate and know that mortgage rates are usually somewhere between 1.75% and 2% higher than whatever the ten-year T-bill rate is.
Truth In Lending Act And Two-Step Mortgage
Our next T is the Truth in Lending Act. This is very good for you because it is a Federal Law obligating a lender to give full written disclosure of fees, terms, and conditions associated with the loan. The next T is a two-step mortgage. I’m telling you this because some old-school people like to call it that. This is another term for an arm that adjustable-rate mortgage.
Again, don’t even think about getting into an adjustable-rate mortgage until you research the crap out of it. The next T is Trust. This is going to come to play a couple of different ways if you are a first-time home buyer. First, after you buy your home, you should seriously consider putting your home into a trust because even if you have a will and all the title holders become unlive, that is the parish and deceased.
That home goes into probate, and you don’t want that but trust will protective from that. Now, the second way is when you are looking to purchase a home that has marked a trust sale. You are going to have a few giant hurdles that you need to be aware of. First of all, you are going to be dealing with feuding siblings that can’t agree on how much granny’s house should sell for. Do not expect a simple contract negotiation. Sometimes, when that happens, you have attorneys and courts and other people that need to approve everything before you can get your offer accepted.
You might get your offer accepted by the first person who gets it but then they are going to go and show it to the whole gang or the judge. It might not be accepted at all. Make sure you have a unicorn who understands these trust sales. Be ready to buy a home like an investor. Not like a regular first-time home buyer.
There you go. That’s episode one for the T. Stay tuned for part two, which is going to be all things title. Check out the YouTube at How to Buy a Home podcast for more information. Instagram, @DavidSidoni, TikTok, @HowToBuyAHome, and you can always get everything at HowToBuyAHome.com. Please share the show and review on Apple and Spotify. You can review it there now. Ninety-four seconds to write one quick little review for the hours of free content. It’s a pretty good deal, and It will help keep the lights on here and also spread the word and make this revolution grow because we want educated, informed, and empowered first-time home buyers. You can do this.
- Episode 136 – First Time Home Buyer Terms And Definitions From A-Z – “O-P” – Part 1
- Episode 137 – First Time Home Buyer Terms And Definitions from A-Z – “P” Part 2
- Episode 138 – First Time Home Buyer Terms And Definitions From A-Z – “P” Part 3
- How to Buy a Home podcast – YouTube
- @DavidSidoni – Instagram
- @HowToBuyAHome – TikTok
- Apple – How To Buy A Home
- Spotify – How To Buy A Home
This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!