Glossary of Terms
Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes over time in line with
movements in the index. ARMs are also referred to as AMLs (adjustable
mortgage loans) or VRMs (variable rate mortgages).
Adjustment Period
The length of time between interest rate changes on the ARM. For example,
a loan with an adjustment period of one year is called a one-year
ARM, which means that the interest rate can change once a year.
Amortization
Repayment of a loan in installments of principal and interest, rather
than interest-only payments.
Annual Percentage Rate (APR)
The total finance charge (interest, loan fees, points) expressed as
a percentage of the loan amount.
Appraisal
An estimate of the property's value.
Assumption of Mortgage
A buyer's agreement to assume the liability under an existing note
that is secured by a mortgage or deed of trust. The lender must approve
the buyer in order to release the original borrower (usually the seller)
from liability.
Balloon Payment
A lump sum principal payment due at the end of some mortgages or other
long-term loans.
Binder
Sometimes known as an offer to purchase or an earnest money receipt.
A binder is the acknowledgement of a deposit along with a brief written
agreement to enter into a contract for the sale of real estate.
Buydown
Permanent: Prepaid interest that brings the note rate on the
loan down to a lower, permanent rate. Temporary: Prepaid interest
that lowers the note rate temporarily on the loan, allowing the buyer
to more rapidly qualify and to increase payments as income grows.
Cap
The limit on how much an interest rate or monthly payment can change,
either at each adjustment or over the life of the mortgage.
Cash Reserves
The amount of the buyer's liquid cash remaining after making the down
payment and paying all closing costs.
CC&Rs
Covenants, conditions and restrictions. A document that controls the
use, requirements and restrictions of a property.
Certificate of Committment
The lender's approval of a VA loan, which is usually good for up to
six months.
Certificate of Reasonable Value (CRV)
A document that establishes the maximum value and loan amount for
a VA guaranteed mortgage.
Chattel
Personal property.
Closing Statement
The financial disclosure statement that accounts for all of the funds
received and expected at the closing, including deposits for taxes,
hazard insurance, and mortgage insurance.
Committment Period
The period during which a loan approval is valid.
Condominium
A form of real estate ownership where the owner receives title to
a particular unit and has a proportionate interest in certain common
areas. The unit itself is generally a separately owned space whose
interior surface (walls, floors, and ceilings) serve as its boundaries.
Contingency
A condition that must be satisfied before a contract is binding. For
instance, a sales agreement may be contingent upon the buyer obtaining
financing.
Conversion Clause
A provision in some ARMs that enables home buyers to change an ARM
to a fixed rate loan, usually after the first adjustment period. The
new fixed rate is generally set at the prevailing interest rate for
fixed rate mortgages. This conversion feature may cost extra.
Cooperative
A form of multiple ownership in which a corporation or business trust
entity holds title to a property and grants occupancy rights to shareholders
by means of proprietary leases or similar agreements.
CRB
Certified Residential Broker. To be certified, a broker must be a
member of the National Association of Realtors©, have five years
experience as a licensed broker and have completed required Residential
Division courses.
CRS
Certified Residential Specialist.
Debt Ratios
The comparison of a buyer's housing costs to his or her gross or net
effective income, and the comparison of a buyer's total long-term
debt to his or her gross or net effective income. The first ratio
is housing ratio, the second ratio is total debt ratio.
Due-on-Sale Clause
A clause that requires a full payment of a mortgage or deed of trust
when the secured property changes ownership.
Earnest Money
The portion of the down payment delivered to the seller or escrow
agent by the purchaser with a written offer as evidence of good faith.
Escrow
A procedure in which a third party acts as a stakeholder for both
the buyer and the seller, carrying out both parties' instructions
and assuming responsibility for handling all of the paperwork and
distribution funds.
Equity
The idfference between what is owed and what the property could be
sold for.
FHA Loan
A loan insured by the Federal Housing Administration (of the Department
of Housing and Urban Development).
Federal Home Loan Mortgage Corporation (FHLMC)
Called "Freddie Mac;" a part of the secondary market, particularly
used to purchase loans from savings and loan lenders within the Federal
Home Loan Bank Board.
Federal National Mortgage Association (FNMA)
Popularly known as "Fannie Mae." A privately owned corporation
created by Congress to support the secondary mortgage market. It purchases
and sells residential mortgages insured by FHA or guaranteed by the
VA, as well as conventional home mortgages.
Fee Simple
An estate in which the owner has unrestricted power to dispose of
the property as he wishes, including leaving by will or inheritance.
It is the greatest interest a person can have in real estate.
Finance Charge
The total cost a borrower must pay, directly or indirectly, to obtain
credit according to Regulation Z.
Fixed Rate Mortgage
A conventional loan with a single interest rate for the life of the
loan.
Fully Indexed Rate
The maximum interest rate on an ARM that can be reached at the first
adjustment.
Gift Letter
A letter from a relative stating that an amount will be gifted to
the buyer, and that said amount is not to be repaid.
Government National Mortgage Association (GNMA)
Called "Ginnie Mae," a governmental part of the secondary
market that deals primarily in recycling VA and FHA mortgages, particularly
those that are highly leveraged.
Graduated Payment Mortgage
A residential mortgage with monthly payments that start at a low level
and increase at a predetermined rate.
GRI
Graduate, Realtors Institute. A professional deisignation granted
to a member of the National Association of Realtors© who has
successfully completed courses covering Law, Finance and Principles
of Real Estate.
Home Inspection Report
A qualified inspector's report on a property's overall condition.
The report usually includes an evaluation of both the structure and
mechanical systems.
Home Warranty Plan
Protection against failure of mechanical systems within the property.
Usually includes plumbing, electrical, heating systems and installed
appliances.
Index
A measure of interest rate changes used to determine changes in an
ARM's interest rate over the term of the loan.
Initial Interest Rate
The introductory interest rate on a loan; signals that there may be
rate adjustments later in the loan.
Joint Tenancy
An equal undivided ownership of property by two or more persons. Upon
the death of any owner, the survivors take the decendant's interest
in the property.
Jumbo Loans
Mortgage loans that exceed the loan amounts acceptable for sale in
the secondary market; these jumbos must be packaged and sold differently
to investors and therefore have separate underwriting guidelines.
Lien
A legal hold or claim on property as security for a debt or charge.
Loan Committment
A written promise to make a loan for a specified amount on specified
terms.
Loan-To-Value Ratio
The relationship between the amount of the mortgage and the appraised
value of the property, expressed as a percentage of the appraised
value.
Lock-in
The fixing of an interest rate or points at a certain level, usually
during the loan application process. It is usually done for a certain
period of time, such as 60 days, and may require a fee or premium
in the form of a higher interest rate.
Margin
The number of percentage points the lender adds to the index rate
to calculate the ARM interest rate at each adjustment.
Mortgage Insurance Premium (MIP)
The mortgage insurance required on FHA loans for the life of said
loans; MIP can either be paid in cash at closing or financed in its
entirety in the loan. The premium varies depending on the method of
payment.
Mortgage Life Insurance
A type of term life insurance often bought by home buyers. The coverage
decreases as the mortgage balance declines. If the borrower dies while
the policy is in force, the mortgage debt is automatically covered
by insurance proceeds.
Negative Amortization
Occurs when the monthly payments fail to cover the interest cost.
The interest that isn't covered is added to the unpaid principal balance,
which means that even after several payments the borrowers could owe
more than they did at the beginning of the loan. Negative amortization
can occur when an ARM has a payment cap that results in monthly payments
that aren't high enough to cover the interest.
Origination Fee
A fee or charge for work involved in evaluating, preparing, and submitting
a proposed mortgage loan. The fee is limited to 1 person for FHA and
VA loans.
Payment Cap
The maximum amount the payment can adjust in any given time frame.
PITI
Principal, Interest, Taxes and Insurance.
Planned Unit Development (PUD)
A zoning designation for property developed at the same or slightly
greater overall density than conventional development, sometimes with
improvement clustered between open, common areas. Use may be residential,
commercial or industrial.
Point
An amount equal to one percent of the principal amount of the investment
or note. Lender assesses loan discount points at closing to increase
the yield on the mortgage to a position competitive with other types
of investments.
Prepayment Penalty
A fee charged to a borrower who pays a loan before it is due. Not
allowed for FHA or VA loans.
Private Mortgage Insurance (PMI)
Insurance written by a private company protecting the lender against
loss if the borrower defaults on the mortgage.
Purchase Agreement
A written document in which the purchaser agrees to buy certain real
estate and the seller agrees to sell under stated terms and conditions.
Also called a sales contract, earnest money contract, or agreement
for sale.
Rate Gap
The difference between where the rate is now and where it could adjust
to on an ARM. Also used to compare the difference between a current
conventional rate and that of an ARM.
Realtor©
A real estate broker or associate active in a local real estate board
affiliated with the National Association of Realtors©.
Regulation Z
The set of rules governing consumer lending issued by the Federal
Reserve Board of Governors in accordance with the Consumer Protection
Act.
Tenancy in Common
A type of joint ownership of property by two or more persons with
no right of survivorship.
Title Insurance Policy
A policy that protects the purchaser, mortgagee or other party against
losses.
VA Loan
A loan, made by a private lender, that is partially guaranteed by
the Veterans Administration
