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Mortgage Terms
and Definitions
Additional principal payment
Extra money included in the monthly payment to help reduce the
principal and shorten the term of the loan.
Add-on
interest
The interest a borrower pays on the principal for the duration
of the loan.
Adjustable-rate mortgage (ARM)
A loan with an interest rate that is periodically adjusted to
reflect changes in a specified financial index.
Adjusted
cost basis
The cost of any improvements the seller makes to the property.
Deducting the cost from the original sales price provides the
profit or loss of a home when it is sold.
Adjustment period
The amount of time between interest rate adjustments in an
adjustable-rate mortgage.
Agent
A person licensed by the state to conduct real estate
transactions.
Alienation clause
A provision that requires the borrower to pay the balance of
the loan in a lump sum after the property is sold or
transferred.
Amortization
The process of paying the principal and interest on a loan
through regularly scheduled installments.
Annual
Percentage Rate (APR)
The cost of the loan expressed as a yearly rate on the balance
of the loan.
Application
A document that details a potential borrower's income, debt
and other obligations to determine credit worthiness.
Application fee
The fee that a lender charges to process a loan application.
Appraisal
An opinion of the value of a property at a given point in
time.
Appreciation
An increase in the value of a home or other property.
Assessed
value
A tax assessor's determination of the value of a home in order
to calculate a tax base.
Assumable mortgage
A mortgage that can be transferred to another borrower.
Average
price
The price of a home determined by totaling the sales prices of
all houses sold in an area and dividing that number by the
number of homes.
Balloon
Mortgage
A mortgage in which monthly installments are not large enough
to repay the loan by the end of the term. As a result, the
final payment due is the lump sum of the remaining principal.
Balloon
payment
The final lump sum payment due at the end of a balloon
mortgage.
Basis
Point
A basis point is one one-hundredth of one percentage point.
For example, the difference between a loan at 8.25 percent and
a mortgage at 8.37 percent is 12 basis points.
Bill of
sale
A document that transfers ownership of personal property.
Binder
A report issued by a title insurance company that details the
condition of a home's title. and provides guidelines for a
title insurance policy.
Biweekly
mortgage
A mortgage that requires payments every two weeks and helps
repay the loan over a shorter term.
Blanket
insurance policy
A policy that covers more than one person or piece of
property.
Blanket
mortgage
A mortgage that covers more than one property owned by the
same borrower.
Broker
A person licensed by the state to deal in real estate.
Cap
A limit on the amount the interest rate or monthly payment can
increase in an adjustable-rate mortgage.
Capital
expenditure
The cost of making improvements on a property.
Cash-out
refinance
The refinancing of a mortgage in which the money received from
the new loan is greater than the amount due on the old loan.
The borrower can use the extra funds in any manner.
Closing
The final procedure in which documents are signed and
recorded, and the property is transferred.
Closing
costs
Expenses incidental to the sale of real estate, including
loan, title and appraisal fees.
Closing
statement
A document which details the final financial settlement
between a buyer and seller and the costs paid by each party.
Commercial property
An area that is zoned for businesses.
Commission
The negotiable percentage of the sales price of a home that is
paid to the agents of the buyer and seller.
Community Reinvestment Act
A federal law that encourages financial institutions to loan
money in the neighborhoods where minority depositors live.
Compound
interest
The interest paid on the principal balance in a mortgage and
on the accrued and unpaid interest of the loan.
Construction loan
Short-term loans a lender makes for the construction of homes
and buildings. The lender disburses the funds in stages.
Contingency
A condition specified in a purchase contract, such as a
satisfactory home inspection.
Conventional loan
A long-term loan a lender makes for the purchase of a home.
Convertible adjustable-rate mortgage
A mortgage which starts as an adjustable-rate loan, but allows
the borrower to convert the loan to a fixed-rate mortgage
during a specified period of time.
Cost-plus contract
A construction contract that determines the builder's profit
based on a percentage of the cost of labor and materials.
Credit
The money a lender extends to a buyer for a commitment to
repay the loan within a certain time frame.
Credit
rating
The degree of credit worthiness assigned to a person based on
credit history and financial status.
Credit
report
A credit bureau report that shows a loan applicant's history
of payments made on previous debts. Several companies issue
credit reports, but the three largest are Trans Union Corp.,
Equifax and Experian (formerly TRW ).
Deed
The legal document that transfers ownership of a piece of
property.
Deed of
trust
A document that gives a lender the right to foreclose on a
piece of property if the borrower defaults on the loan.
Default
The failure to fulfill a duty or promise or discharge an
obligation, such as making monthly mortgage payments.
Deferred
maintenance
Any repair or maintenance of a piece of property that has been
postponed, resulting in a decline in property value.
Delinquent Mortgage
A mortgage that involves a borrower who is behind on payments.
If the borrower cannot bring the payments up to date within a
specified number of days, the lender may begin foreclosure
proceedings.
Depreciation
The decline in value of a piece of property.
Disclosure
A statement to a potential buyer listing information relevant
to a piece of property, such as the presence of radon or lead
paint.
Down
payment
The amount of money a buyer agrees to give the seller when a
sales agreement is signed. Complete financing is later secured
with a lender.
Draw
A payment made to subcontractors or suppliers from a
construction loan.
Early
occupancy
The condition in which buyers can occupy the property before
the sale is completed.
Equity
A determination of the value of a property after existing
liens are deducted.
Errors
and omissions insurance
A policy that pays for any mistakes a builder or architect
makes in a project.
Escrow
A neutral third party holds the documents and money involved
in a real estate transaction and ensures that all conditions
of a sale are met.. Escrow also refers to a special account
that a lender establishes to hold monthly installments from
the borrower to cover property taxes and insurance.
Escrow
closing
Escrow closes when all conditions of a real estate transaction
are met and the title of the property is transferred to the
buyer.
Fair
Credit Reporting Act
A federal law passed in 1971 that regulates the activity of
credit bureaus. It is designed to prevent inaccurate or
obsolete information from staying in a consumer's credit file
and requires credit bureaus to have reasonable procedures for
gathering, maintaining and disseminating credit information.
The act also requires credit bureaus to show a consumer their
credit file if the consumer presents proper identification,
although the bureau reserves the right to charge a fee for
doing so.
Fair
Housing Act
Landmark federal law passed in 1965 and amended in 1988 that
makes it illegal to deny rent or refuse to sell to anyone
based on race, color, religion, sex or national origin. The
1988 amendment expanded the protections to include family
status and disability.
Fannie
Mae
The official name of the Federal National Mortgage
Association, it is a congressionally chartered,
shareholder-owned company that buys mortgages from lenders and
resells them as securities on the secondary mortgage market.
(FHA)
Federal
Housing Administration
This government agency operates a variety of home-loan
programs. Its most popular is the Sec. 203(b), program, which
provides low-rate mortgages to buyers who make a down payment
as small as 3 percent.
FHA
loans
Mortgages that are insured by the Federal Housing
Administration. The FHA's 203(b) loan program provides
low-rate mortgages to buyers who make a down payment as small
as 3 percent. The agency also operates loan plans for
investors and purchasers of rural property.
Fixed
installment
The monthly payment on a home loan.
Fixed-rate mortgage
A home loan with an interest rate that will remain at a
specific rate for the term of the loan. About 75 percent of
all home mortgages have fixed rates.
Flat fee
A set fee charged by a broker instead of a commission.
Flood
insurance
Hazard coverage that is required in designated flood areas.
Forbearance
A course of action a lender may pursue to delay foreclosure or
legal action against a delinquent borrower.
Foreclosure
The legal process reserved by a lender to terminate the
borrower's interest in a property after a loan has been
defaulted. When the process is completed, the lender may sell
the property and keep the proceeds to satisfy its mortgage and
any legal costs. Any excess proceeds may be used to satisfy
other liens or be returned to the borrower.
(FSBO)
For Sale By Owner
The owner acts as the agent to avoid paying a sales
commission.
Freddie
Mac
The common name for the Federal Home Loan Mortgage
Corporation, a congressionally chartered institution that buys
mortgages from lenders and resells them as securities on the
secondary mortgage market.
Fully
amortized adjustable-rate mortgage
A mortgage that amortizes, or pays down, the balance of a
loan.
Gift
A cash gift a buyer receives from a relative or other source.
Lenders usually require a "gift letter" stating that the money
will not have to be repaid.
Grace
period
A specified amount of time to make a loan payment after its
due date without penalty.
(GPM)
Graduated-payment mortgage
A mortgage that requires a borrower to make larger monthly
payments over the term of the loan. The payment is unusually
low for the first few years but gradually rises until year
three or five, then remains fixed.
Guarantee mortgage
A loan guaranteed by a third party, such as a government
institution.
Hazard
insurance
This provision of homeowners insurance covers damage by fire,
wind or other disaster. It is required by all lenders before a
loan is approved.
Home
equity loan
A loan that allows owners to borrow against the equity in
their homes.
Home
inspection
An examination of a home's construction, condition and
internal systems by an inspector or contractor prior to
purchase.
Homeowners' association
A group that governs a modern subdivision or planned
community. An association collects monthly fees from all
owners to pay for maintenance of common areas, handle legal
and safety issues, and enforce the covenants, conditions and
restrictions set by the developer.
Homeowners' insurance
This insurance includes hazard coverage for any damages that
may affect the value of a house, in addition to personal
liability and theft coverage.
Home
warranty
A type of insurance that covers repairs to certain parts of a
house and some fixtures.
Impounds
A portion of the monthly mortgage payment that is placed in an
account and used to pay for hazard insurance, property taxes
and private mortgage insurance.
Income
property
Property that is not occupied by the owner but is used to
generate income.
Index
Financial tables used by lenders to calculate interest rates
on adjustable mortgages and on Treasury bills.
Initial
interest rate
The original interest rate on an adjustable mortgage.
Interest
The fee borrowers pay to obtain a loan. It is calculated based
on a percentage of the total loan.
Interest
accrual rate
The rate at which interest accrues on a mortgage.
Interest-only loan
The pays only the interest that accrues on the loan balance
each month. Because each payment goes toward interest, the
outstanding balance of the loan does not decline with each
payment.
Interest
Rate
The sum, expressed as a percentage, charged for a loan.
Interest payments on most home loans are tax- deductible.
Interest
rate buy-down plans
For cash-short buyers, some sellers are willing to advance
funds from the sale of the home to buy down the interest rate
and reduce the buyer's monthly obligation.
Interest
rate caps
A limit on the amount that can be charged to the monthly
payment of an adjustable-rate mortgage during an adjustment
period.
Interest
rate ceiling
The highest interest a lender can charge for an
adjustable-rate mortgage.
Investment property
Real estate that generates income, such as an apartment
building or a rental house.
Jumbo
mortgage
Loans that exceed limits set by Fannie Mae and Freddie Mac.
The current limit is $417,000.
Late
charge
A fee a lender imposes on a borrower when the borrower does
not make a payment on time.
Lender
A bank, savings institution or mortgage company that offers
home loans.
Liability insurance
A policy that protects owners against any claims of
negligence, personal injury or property damage.
Lien
A claim laid by one person or company on the property of
another as security for money owed.
Life cap
A limit on the amount that a loan rate can move during the
term of the mortgage. For example, the rate on an
adjustable-rate mortgage that begins at 5 percent and has a
lifetime cap of 6 percentage points cannot rise above 11
percent, even if rates on fixed-rate mortgages soar to 20
percent.
Loan
application
The first step toward submitting a home loan requires the
borrower to itemize basic financial information.
Loan
application fee
A fee charged by lenders to for making a loan application.
Loan
commitment
A promise by a lender or other financial institution to make
or insure a loan for a specified amount and on specific terms.
Loan
officer
An official representative of a lending institution who is
empowered to act on behalf of the lender within certain
limits.
Loan
origination fee
Most lenders charge borrowers an origination fee--or
points--for processing a loan. A point is 1 percent of the
total loan amount.
Loan
processing fee
A fee charged by some lenders for gathering information to
enable the lender to process the loan.
Loan
term
The amount of a time set by the lender for a buyer to pay a
mortgage. Most conventional loans have 30-year or 15-year
terms.
Loan-to-value ratio
A technical measure used by lenders to assess the relationship
of the loan amount to the value of the property
Low-documentation loan
A mortgage that requires only minimal verification of income
and assets.
Low-down-payment loan
A home loan that requires the borrower to make only a small
down payment before obtaining the financing needed to purchase
a house.
Margin
The lender's "retail markup" on the mortgage. For example, if
the index rate for an adjustable-rate mortgage is 5 percent
but the lender has a 2.5 percentage-point margin, the rate the
borrower will pay is 7.5 percent.
Market
value
The price that a piece of property sells for at a particular
point in time.
Mechanic's lien
Subcontractors or suppliers sometimes will file an
encumbrance, or mechanic's lien, against a property to seek
payment.
Mortgage
A legal document specifying a certain amount of money to
purchase a home at a certain interest rate, and using the
property as collateral.
Mortgage
acceleration clause
A clause which allows a lender to demand that the entire
balance of the loan be repaid in a lump sum under certain
circumstances. The acceleration clause is usually triggered if
the home is sold, title to the property is changed, the loan
is refinanced or the borrower defaults on a scheduled payment.
Mortgage
banker
A company that provides home loans using its own money. The
loans are usually sold to investors such as insurance
companies and Fannie Mae.
Mortgage
broker
A company that matches lenders with prospective borrowers who
meet the lender's criteria. The mortgage broker does not make
the loan, but receives payment from the lender for services.
Mortgage
insurance
Required by lenders in some loans to protect them from a
possible default . All conventional loans with less than a 20
percent down payments require private mortgage insurance, or
PMI.
Multiple
listing service (MLS)
The service combines the listings for all available homes in
an area, except For-Sale-By-Owner (FSBO) properties, in one
directory or database.
Negative
amortization
The situation occurs when a borrower's monthly payment is not
large enough to cover both the principal and interest of a
loan. As a result, the outstanding balance of the loan
actually grows larger with each payment rather than smaller.
Most fixed-rate loans are not subject to negative
amortization, but many adjustable-rate mortgages are
susceptible.
No-documentation loan
A loan application that does not require verification of
income but typically is granted in cases of large down
payments.
Non-assumption clause
A loan provision that prohibits the transfer of a mortgage to
another borrower without lender approval.
Non-recurring closing costs
Costs that are one-time only fees for such items as an
appraisal, loan points, credit report, title insurance and a
home inspection.
Note
The legal document that requires a borrower to repay a
mortgage at a certain interest rate over a specified period of
time.
Note
rate
The interest rate specified in a mortgage note.
Notice
of default
A lender's initial action when a mortgage payment is late and
attempts to reconcile the issue out of court have failed.
Origination fee
A fee charged by most lenders--also called points--for
processing a loan. A point is 1 percent of the total loan
amount.
Owner
financing
A transaction in which the seller of a property agrees to
finance all or part of the purchase.
(PITI
)Principal, Interest, Taxes, Insurance
When a buyer applies for a loan, the lender will calculate the
principal, interest, taxes and insurance. The figure is
designed to represent the borrower's actual monthly
mortgage-related expenses.
Point
Fees charged by lenders at the time a loan is originated. A
point is equal to 1 percent of the total loan amount.
Pre-approval letter
A letter from a lender that informs a seller about the amount
of money that a potential buyer can obtain.
Prepaid
expenses
The costs for taxes, insurance and assessments paid before the
due date.
Prepaid
interest
Interest paid before it is due. For example, at the close of a
real estate transaction borrowers usually pay for the interest
on their loan that falls between the closing period and the
first monthly payment.
Prepayment penalty
Lenders can impose a penalty on a borrower who pays a loan off
before its expected end date.
Pre-qualification
Many lenders will pre-qualify a borrower who is shopping for a
loan by completing a preliminary assessment of the buyer's
ability to pay for a home.
Principal
The amount of money that the borrower owes on a mortgage.
(PMI)
Private
mortgage insurance
A special type of loan insurance that many lenders require
borrowers to purchase if the borrower's down payment is less
than 20 percent of the home's purchase price.
Property
tax
Property taxes are calculated at about 1.5 percent of the
current market value.
Property
value
The value of a piece of property is based on the price a buyer
will pay at a certain time.
Purchase
agreement
A document which details the purchase price and conditions of
the transaction.
Qualifying ratios
Lenders compute qualifying ratios to determine how much a
potential buyer can borrow.
Quit-claim deed
A document that releases a party from any interest in a piece
of real estate.
Rate-improvement mortgage
A loan with a clause that entitles a borrower to a one-time
cut in the interest rate without going through refinancing.
Rate
lock
When interest rates are volatile, many borrowers want to "lock
in" an interest rate and many lenders will oblige, setting a
limit on the amount of time the guaranteed interest rate is in
effect.
Real
estate
Land and anything permanently affixed to it, including
buildings, fences and other items attached to the structure.
Real
estate agent
A real estate agent has a state license to represent a buyer
or a seller in a real estate transaction in exchange for a
commission. Most agents work for real estate brokers.
Real
estate broker
A real estate agent who is licensed by the state to represent
a buyer or seller in a real estate transaction in exchange for
a commission. Most brokers also have agents working for them,
and are entitled to a portion of their commissions.
Real
estate investment trusts (REITs)
The trusts are publicly traded companies that own, develop and
operate commercial properties.
Real
Estate Settlement Procedures Act (RESPA)
A federal law designed to make sellers and buyers aware of
settlement fees and other transaction-related costs. RESPA
also outlaws kickbacks in the real estate business.
Recording fee
A fee charged by real estate agents for conveying the sale of
a piece of property into the public record.
Refinancing
The process of replacing an older loan with a new mortgage
that has better terms.
Regulation Z
The federal code issued under the Truth-in-Lending Act which
requires that a borrower be advised in writing of all costs
associated with the credit portion of a financial transaction.
Rehabilitation mortgage
A mortgage that provides for the costs of repairing and
improving a resale home or building.
Remaining balance
The amount of unpaid principal on a home loan.
Resale
value
The future value of a piece of property that can be affected
by many factors, including the surrounding neighborhood,
school scores, and economic and housing market conditions.
Reserve
fund
All homeowners associations set aside a certain amount of
money for major repairs or improvements.
Restructured loan
A mortgage in which new terms are negotiated.
Return
on investment
The amount of profit a property generates.
Reverse
mortgage
A special type of loan available to equity-rich, older owners.
Repayment is not necessary until the borrower sells the
property or moves into a retirement community.
Right of
first refusal
An agreement by a property owner to give another person the
right to buy or rent the property before it goes on the open
market.
Right to
rescission
A provision in the federal Truth-in-Lending Act that allows
borrowers to cancel certain kinds of loans within three days
of signing.
Second
mortgage
Another loan placed upon a piece of property.
Secured
loan
Any loan backed by collateral.
Servicer
A firm that collects mortgage payments and manages borrowers'
escrow accounts.
Settlement statement
A document that details who has paid what to whom.
Shared-appreciation mortgage
A loan that allows a lender or other party to share in the
borrower's profits when the home is sold.
Shared-equity transaction
A transaction in which two buyers purchase a property, one as
a resident co-owner and the other as an investor co-owner.
Special
assessment
When a homeowners' association needs or wants extra funds, it
levies a special assessment upon the owners.
Step-rate mortgage
A loan that allows a gradual increase in the interest rate
during the first few years of the loan.
Subordinate loan
A second or third mortgage.
Sweat
equity
The non-cash value put into a piece of property by the owner,
such as do-it-yourself home improvements.
Teaser
rate
An low, short-term rate offered on a mortgage to entice the
borrower.
Title
The actual legal document conferring ownership of a piece of
real estate.
Title
company
Firms that ensure that the title to a piece of property is
clear and provide title insurance.
Title
insurance
A policy issued to lenders and buyers to protect any losses
because of a dispute over the ownership of a piece of
property.
Townhouse
An attached home that is not a condominium.
Transfer
of ownership
Any legal means by which a piece of real estate changes hands.
Truth-in-Lending Act
A federal law that protects consumers in a variety of ways.
One of its key provisions allows a consumer to cancel a
home-improvement loan, second mortgage or other loan if the
home was pledged as security (except for a first mortgage or
first trust deed) until midnight of the third business day
after the contract was signed.
Two-step
mortgage
An adjustable mortgage with two interest rates, one for the
first five or seven years of the loan, and the other for the
remainder of the loan term.
Underwriting
The process that lenders go through to evaluate the risks
posed by a particular borrower and to set appropriate
conditions for the loan.
U.S.
Department. of Housing and Urban Development (HUD)
A federal agency that oversees the Federal Housing
Administration and a variety of housing and community
development programs.
Unsecured loan
Any loan that is not backed by collateral.
Variable
rate
An interest rate that changes with fluctuations in such
indexes as the U.S. Treasury bill index.
Verification of deposit
Part of the loan process, in which a lender will ask a
borrower's bank to sign a statement verifying the borrower's
account balances and history.
Verification of employment
Part of the loan process, in which a lender asks the
borrower's employer for confirmation of the borrower's
position and salary.
Veterans
Administration (VA)
The U.S. Department of Veterans Affairs operates a variety of
programs to help veterans. One of the key plans it oversees is
the VA loan program, which allows most veterans to purchase a
house without a down payment.
VA loan
A program that allows most veterans to purchase a house
without a down payment.
Wraparound mortgage
A loan to a buyer for the remaining balance on a seller's
first mortgage and an additional amount requested by the
seller. Payments on both loans are made to the lender who
holds the wraparound loan
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