GLOSSARY OF TERMS
Adjustable-rate mortgage (ARM)
A mortgage having an interest rate that can change at designated
intervals, based on a financial index.
Amortization schedule
A schedule that shows the portions of each payment that are applied
to interest and to principal. It also shows the loan balance remaining
after each payment.
Annual percentage rate (APR)
A rate that reflects the actual cost of a loan, incorporating the
loan interest rate, private mortgage insurance, points and fees.
Assessed value
The value placed on a property by local officials for taxation purposes
(may or may not equal appraised value).
Assumable mortgage
A mortgage that a buyer can take over from the seller of a property.
Balloon Mortgage
Has principal and interest payments that do not fully amortize the
loan. To compensate, the balance of the mortgage is due in a lump
sum at a specified date in the future.
Binder
A preliminary agreement, secured by the payment of earnest money,
under which a buyer offers to purchase real estate. Or, in insurance,
an agreement confirming temporary coverage pending issuance of a
formal policy.
Biweekly mortgage
A mortgage in which payments are made every two weeks instead of
monthly, thus making the equivalent of 13 monthly payments in a
year (there are 26 two-week periods) instead of 12. Allows more
rapid payment of mortgage and thus less interest paid over life
of the loan.
Cap
A limit set on an ARM as to how much the interest rate or monthly
payments may increase.
Cash reserve
A requirement of some lenders that the buyer have enough cash left
after closing to make the first two mortgage payments.
Clear title
A title to property that is free of liens and legal questions as
to ownership.
Closing
The legal procedure in which the transfer of property becomes final.
Also called settlement.
Closing costs
Costs incurred by the buyer and seller in transferring ownership
of a property.
Commission
Payment to a real estate broker for services performed.
Commitment letter
A lender's formal notice to a borrower that a loan has been approved;
states the terms and conditions of the loan.
Condominium
A form of property ownership in which the owner holds the title
to an individual dwelling, plus interest in common areas of a multi-unit
project.
Contingency
A condition that must be met before a contract is legally binding.
Conventional mortgage
Any mortgage that is not insured or guaranteed by the federal government.
Convertible ARM
An adjustable rate mortgage that can by converted to a fixed rate
mortgage under specified conditions.
Convey
To deed or transfer title of property from one person to another.
Cooperative
A form of common property ownership in which the residents of an
apartment building do not own their own units, but rather own shares
in the corporation that owns the property.
Co-signer
A person who signs and assumes joint liability with another person
for repayment of a debt.
Covenant
A clause in a mortgage that obligates or restricts the borrower
and which, if violated, can result in foreclosure.
Credit report
A report of an individual's credit history prepared by a credit
bureau and used by a lender to determine a loan applicant's creditworthiness.
Deed
The legal document conveying title to a property.
Deed of trust
The document used in some states instead of a mortgage; title is
conveyed to a trustee instead of the borrower.
Deposit
Cash the buyer pays to the seller when both sign a formal sales
contract.
Depreciation
A decline in property value; opposite of appreciation.
Down payment
The part of the purchase price of a home which the buyer pays in
cash up front; not included in the loan.
Earnest money
A deposit given to the seller by the buyer when submitting an offer
to show serious intent about buying a property.
Equity
The difference between the market value of a property and the owner's
outstanding mortgage balance.
Escrow
The holding of documents and money (such as a deposit) by a neutral
third party prior to closing. Also an account held by the lender
into which a homeowner pays money for taxes and insurance.
Fannie Mae (FNMA)
An acronym for the Federal National Mortgage Association. Fannie
Mae purchases mortgage loans originated by local lenders and sets
guidelines that lenders must follow to qualify prospective borrowers.
FHA loan
A loan insured by the Federal Housing Administration requiring a
low down payment.
Flood insurance
Insurance that will be required if a property is in a federally
designated flood hazard area.
Foreclosure
The legal process by which a mortgaged property may be sold when
a mortgage is in default.
Freddie Mac (FHLMC)
An acronym for the Federal Home Loan Mortgage Corporation. Another
of the major purchasers of mortgages from local lenders. See also
Fannie Mae.
Good faith estimate
A written estimate of closing costs provided by lender within three
days after someone applies for a loan.
Hazard insurance
Insurance to protect the homeowner and lender against physical damage
to property from fire, wind, vandalism and other hazards.
Homeowner's insurance
An insurance policy that combines hazard insurance and liability
coverage.
Interest
The cost for borrowing money.
Interest rate cap
A provision of an ARM that limits how much the interest rate can
increase per adjustment period.
Jumbo mortgage
A mortgage loan that exceeds the conforming limit (changes regularly)
as determined by the Federal National Mortgage Association.
Lien
A legal claim against a property that must be paid when a property
is sold.
Lifetime cap
A provision of an ARM limiting the total increase in the interest
rate over the life of the loan.
Loan-to-value ratio (LTV)
The ratio between the amount of the mortgage and the total value
of the property.
Lock-in rate
An interest rate the lender guarantees to the borrower provided
the mortgage is closed within a certain period of time. The borrower
pays a fee for this guarantee.
Mortgage
A legal document that pledges a property to the lender as security
for payment of a debt.
Mortgage note
A legal document obligating a borrower to repay a loan at a stated
interest rate during a specified time period; this is secured by
a mortgage.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Offer to purchase
A formal document in which a buyer proposed to buy a property for
a specified amount and under certain conditions. Acceptance by the
seller creates a contract binding on both parties, subject to any
contingencies.
Origination fee
A fee paid to a lender for processing a loan application, stated
as a percentage of the mortgage amount, or points. Due at closing.
Owner financing
A purchase in which the seller provides all or part of the financing
for the buyer.
Payment cap
A provision of some ARMs limiting how much the borrower's payments
may increase, regardless of how much the interest rate increases.
PITI
Stands for principal, interest, taxes and insurance-the components
of a monthly mortgage payment.
Points
A one-time charge by the lender to increase the yield of a loan.
Equal to one percent of the loan amount and paid at closing.
Pre-approval
The process of applying for a mortgage without a specific property.
Pre-qualification
The process of determining how large a loan a prospective homebuyer
can qualify for; this procedure is done before actually applying
for the loan.
Principal
The amount originally borrowed. Also that amount of the monthly
mortgage payment that reduces the outstanding balance of a mortgage.
Private mortgage insurance (PMI)
Insurance provided by a non-government insurer to protect a lender
against loss if a borrower defaults. Usually required if down payment
is less that 20%.
Real Estate Settlement Procedures Act (RESPA)
A federal consumer protection law that requires lenders to give
borrowers advance notice of closing costs.
Refinancing
The process of obtaining a new mortgage, usually at a lower rate,
to repay and replace an existing mortgage.
Right of first refusal
An owner's promise to let someone make the first offer on a property,
or to match the amount offered by another party.
Second mortgage
An additional mortgage behind the first mortgage on a property.
The rights of the second mortgage holder are subordinate to the
rights of the first mortgage holder.
Seller take-back
An agreement in which a property owner provides financing to a buyer.
Survey
A drawing showing the legal boundaries of a property and the location
of structures on it.
Termite certificate
A document certifying a property has no termites; may be required
by lender.
Title
A legal document establishing the right of ownership.
Title search
A detailed examination of the title records to ensure that the seller
of a property is the legal owner and that there are no liens or
other claims outstanding.
Transfer tax
State or local tax payable when title passes from one owner
to another.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing,
the terms and conditions of a mortgage, including the APR and other
charges.
Underwriting
The process of evaluating a loan application to determine the
lender's risk.
VA loan
A loan guaranteed by the Veterans Administration, requiring
low or no down payment.
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