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Real Estate terminology can be confusing. Mortgage terminology appears to be even more so, judging from the look on some folks faces when discussions turn to paying points or APR. In
the interest of providing full information, we have included here a glossary
of terms you will most likely encounter when purchasing, or refinancing
a home. Together, the Glossary of Real Estate Terms and the Glossary of
Mortgage Terms should provide you with the vocabulary to understand your
realtor and your mortgage lender. Of course, please feel free to contact
us if you have any questions not covered here.
We
have included links to other relevant pages on this site where appropriate.
Please visit those pages for further discussion.
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Glossary
of Mortgage Terms
A-F | G-L | M-R | S-Z
Adjustable Rate -- An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
Amortization -- A
repayment method in which the amount you borrow is repaid gradually
though regular monthly payments of principal and interest. During the
first few years, most of each payment is applied toward the interest
owed. During the final years of the loan, payment amounts are applied
almost exclusively to the remaining principal.
Annual Membership -- In mortgage terminology, this is an
amount that may be charged annually for having a line of credit
available. Often charged regardless of whether or not you use the line.
Also referred to as a "participation fee."
Annual Percentage Rate (APR) -- The
cost of credit on a yearly basis, expressed as a percentage. Required
to be disclosed by the lender under the federal Truth in Lending Act,
Regulation Z. Includes up-front costs paid to obtain the loan, and is,
therefore, usually a higher amount than the interest rate stipulated in
the mortgage note. Does not include title insurance, appraisal, and
credit report.
Application -- An initial statement of personal and financial information which is required to approve your loan.
Application Fee -- Fees
that are paid upon application. An application fee may frequently
include charges for property appraisal (0-0) and a credit report
(-50).
Appraisal -- A
fee charged by an appraiser to render an opinion of market value as of
a specific date. Required by most lenders to obtain a loan.
Assumption of Mortgage -- The
agreement of a purchaser to become primarily liable for the payments on
a mortgage loan. Unless otherwise specified by the lender, the seller
may remain secondarily liable for payments.
Balloon Payment -- A lump sum payment for the unpaid balance of the loan.
Cap -- The
maximum allowable increase, for either payment or interest rate, for a
specified amount of time on an adjustable rate mortgage.
Cash Out -- Receiving money back when refinancing your present mortgage.
Ceiling--The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.
Closing Costs -- Any
fees paid by the borrowers or sellers during the closing of the
mortgage loan. This normally includes an origination fee, discount
points, attorney's fees, title insurance, survey, and any items which
must be prepaid, such as taxes and insurance escrow payments.
Conforming Loan -- Generally, a mortgage loan under 3,150. Qualifying ratios and underwriting methods are standardized to a large degree.
Contract of Sale -- The
agreement between the buyer and seller on the purchase price, terms,
and conditions necessary to both parties to convey the title to the
buyer. More...
Credit Limit -- The maximum amount that you can borrow under a home equity plan.
Debt Service -- The total amount of credit card, auto, mortgage or other debt upon which you must pay.
Deed of Trust -- Used
in many western states, the agreement used to pledge your home or other
real estate as security for a loan. Similar to a mortgage.
Discount Points (or Points) -- The
amount paid either to maintain or lower the interest rate charged. Each
point is equal to one percent (1%) of the loan amount (i.e., two points
on a $ 100,000 mortgage would equal $ 2,000). More...
Down Payment -- The
difference between the purchase price and that portion of the purchase
price being financed. Most lenders require the down payment to be paid
from the buyer's own funds. Gifts from related parties are sometimes
acceptable, and must be disclosed to the lender.
Due on Sale -- A
clause in a mortgage agreement providing that, if the mortgagor (the
borrower) sells, transfers, or, in some instances, encumbers the
property, the mortgagee (the lender) has the right to demand the
outstanding balance in full.
Effective Interest Rate -- The
cost of credit on a yearly basis expressed as a percentage. Includes
up-front costs paid to obtain the loan, and is, therefore, usually a
higher amount than the interest rate stipulated in the mortgage note.
Useful in comparing loan programs with different rates and points.
Encumbrance -- A claim against a property by another party which usually affects the ability to transfer ownership of the property.
Equity -- The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.
First Mortgage -- A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).
Fixed Rate -- An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.
FHA Loan -- More
appropriately termed "FHA Insured Loan." A loan for which the Federal
Housing Administration insures the lender against losses the lender may
incur due to your default.
Good Faith Estimate -- A written estimate of closing costs which a lender must provide you within three days of submitting an application.
Grace Period -- A
period of time during which a loan payment may be paid after its due
date but not incur a late penalty. Such late payments may be reported
on your credit report.
Gross Income -- For qualifying purposes, the income of the borrower before taxes or expenses are deducted.
Home Equity Line of Credit -- A
loan providing you with the ability to borrow funds at the time and in
the amount you choose, up to a maximum credit limit for which you have
qualified. Repayment is secured by the equity in your home. Simple
interest (interest-only payments on the outstanding balance) is usually
tax-deductible. Often used for home improvements, major purchases or
expenses, and debt consolidation.
Home Equity Loan -- A
fixed or adjustable rate loan obtained for a variety of purposes,
secured by the equity in your home. Interest paid is usually tax
-deductible. Often used for home improvement or freeing of equity for
investment in other real estate or investment. Recommended by many to
replace or substitute for consumer loans whose interest is not
tax-deductible, such as auto or boat loans, credit card debt, medical
debt, and education loans.
Hazard Insurance -- A
contract between purchaser and an insurer, to compensate the insured
for loss of property due to hazards (fire, hail damage, etc.), for a
premium.
HUD I Settlement Statement -- A
form utilized at loan closing to itemize the costs associated with
purchasing the home. Used universally by mandate of HUD, the Department
of Housing and Urban Development. More...
Index -- In mortgage terminology, this is a
number, usually a percentage, upon which future interest rates for
adjustable rate mortgages are based. Common indexes include the Cost of
Funds for the Eleventh Federal District of banks or the average rate of
a one year Government Treasury Security.
Interest Rate -- The periodic charge, expressed as a percentage, for use of credit.
Jumbo Loan -- Mortgage loans over 3,150. Terms and underwriting requirements may vary from conforming loans.
Loan to Value Ratio (LTV) -- A
ratio determined by dividing the sales price or appraised value into
the loan amount, expressed as a percentage. For example, with a sales
price of 0,000 and a mortgage loan of ,000, your loan to value
ratio would be 80%. Loans with an LTV over 80% may require Private
Mortgage Insurance, defined below.
Lock or Lock In -- A
commitment you obtain from a lender assuring you a particular interest
rate or feature for a definite time period. Provides protection should
interest rates rise between the time you apply for a loan, acquire loan
approval, and, subsequently, close the loan and receive the funds you
have borrowed.
Margin -- In mortgage terminology, an amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.
Minimum Payment -- The
minimum amount that you must pay, usually monthly, on a home equity
loan or line of credit. In some plans, the minimum payment may be
"interest only," (simple interest). In other plans, the minimum payment
may include principal and interest (amortized).
Mortgage Banker -- Originates mortgage loans, loaning you their funds and closing the loan in their name.
Mortgage Broker -- As
do mortgage bankers, takes loan application and processes the necessary
paperwork. Unlike a mortgage banker, brokers do not fund the loan with
their own money, but work on behalf of several investors, such as
mortgage bankers, S and L's, banks, or investment bankers.
Mortgage Insurance (MIP or PMI) -- Insurance
purchased by the borrower to insure the lender or the government
against loss should you default. MIP, or Mortgage Insurance Premium, is
paid on government-insured loans (FHA or VA loans) regardless of your
LTV (loan-to-value). Should you pay off a government-insured loan in
advance of maturity, you may be entitled to a small refund of MIP. PMI,
or Private Mortgage Insurance, is paid on those loans which are not
government-insured and whose LTV is greater than 80%. When you have
accumulated 20% of your home's value as equity, your lender may waive
PMI at your request. Please note that such insurance does not
constitute a form of life insurance which pays off the loan in case of
death.
Mortgage Loan -- A
loan which utilizes real estate as security or collateral to provide
for repayment should you default on the terms of your loan. The
mortgage or Deed of Trust is your agreement to pledge your home or
other real estate as security. More...
Mortgagee -- The lender in a mortgage loan transaction.
Mortgagor -- The borrower in a mortgage loan transaction.
Negative Amortization -- Amortization
in which the payment made is insufficient to fund complete repayment of
the loan at its termination. Usually occurs when the increase in the
monthly payment is limited by a ceiling. The portion of the payment
which should be paid is added to the remaining balance owed. The
balance owed may increase, rather than decrease over the life of the
loan.
PITI -- Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.
Points -- The
amount paid either to maintain or lower the interest rate charged. Each
point is equal to one percent (1%) of the loan amount (i.e., two points
on a 0,000 mortgage would equal ,000). More...
Prepayment Penalty -- A fee paid to the lending institution for paying a loan prior to the scheduled maturity date.
Qualifying Ratios -- Comparisons of a borrower's debts and gross monthly income.
Right to Rescission--The
legal right to void or cancel your mortgage contract in such a way as
to treat the contract as if it never existed. Right of rescission is
not applicable to mortgages made to purchase a home, but may be
applicable to other mortgages, such as home equity loans.
Security Interest -- An interest that a lender takes in the borrower's property to assure repayment of a debt.
Servicing a Loan -- The
ongoing process of collecting your monthly mortgage payment, including
accounting for and payment of your yearly tax and/or homeowners
insurance bills.
Title -- The written evidence that proves the right of ownership of a specific piece of property.
Title Insurance -- Protection for lenders or homeowners against financial loss resulting from legal defects in the title.
Transaction Fee -- A fee which may be charged each time you draw on a home equity credit line.
Underwriting--The process of verifying data and approving a loan.
Variable Rate -- An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
VA Loan -- More
appropriately termed "VA Insured Loan." A loan for which the Veteran's
Administration insures the lender against losses the lender may incur
due to your default. Available only to veterans possessing a
Certificate of Eligibility |
Glossary
of Real Estate Terms
A-F | G-L | M-R | S-Z
Agent -- In real estate terminology, an individual who represents a seller, a buyer or both in the purchase or sale of real estate. More...
Amortization -- The schedule of loan payments that establishes the amount of payment to be applied to the principal and the amount to be applied to interest, usually on a monthly basis, for the full term of the loan.
Annual Percentage Rate (APR) -- The
TOTAL interest rate of a mortgage, including the stated loan interest
as well as any up front interest paid in securing the loan. The APR will
invariably differ from the mortgage rate quoted due to the inclusion of
these items.
Appraisal -- An
estimate of value of a Real Estate property by a professional third
party. Virtually all non-owner financed mortgages will require an
appraisal and is generally paid for by the buyer.
Adjustable Rate Mortgage (ARM -- A
mortgage in which the Interest rate is adjustable, meaning that the
rate can go up or down according to prevailing financial market
conditions. More...
Assessment -- The value of a property as determined by the local tax jurisdiction which is used to determine the amount of your property taxes.
Buyer's Agent -- A Real Estate Agent that has made an agreement to represent the buyer exclusively, rather than the seller. More...
Comparable Market Analysis (CMA) -- A
comparison of the prices of similar houses in the same general
geographic area. A CMA is used to help determine the value of a
property, either for a seller or a buyer. More...
Closing -- The
process that effects the final transfer of the deed from the seller to
the buyer, as well as finalize all aspects of the mortgage of the
property. More...
Closing Costs -- Funds
needed at the time of closing (separate from and in addition to the
down payment). Loan origination fees, discount points, Attorney fees,
recording fees and prepaids are some items that may be included. They
often will total from 3% to 5% of the price of the home, payable in
cash.
Contingencies -- In real estate terminology, these
are conditions -- or "safety valves" -- written into Real Estate offers and
contracts to prevent a buyer from being forced to buy a house that is
unsatisfactory -- either structurally or financially. Examples of
contingencies are "This contract is subject to the buyer obtaining a
satisfactory whole house inspection." or "Subject to the buyer being
able to obtain a mortgage."
Condominium -- Housing
where the owner owns only the unit in which the live--from the interior
walls inward, generally--as well as a portion of the common area. More...
Debt to Income Ratio -- The ratio of a borrowers total of debt as a percentage of their total gross income.
Deed -- The
document that, when recorded with your local government, determines
ownership of a property. Transferred from seller to buyer at closing.
Earnest Money -- Money
that is submitted with an offer to purchase which indicates a buyer's
seriousness and good faith. In virtually all cases, earnest money will
need to be submitted at the time of the offer and remains in escrow
until the time of closing, at which time it becomes part of the down
payment.
Equity -- In real estate terminology, the difference between the value of a property and the total of any outstanding mortgages or loans against it.
Escrow -- Funds
held in reserve both prior to closing (for example the earnest money
and deposit) by a third party and after closing by the mortgage company
to pay future taxes and homeowners insurance. In some areas, "escrow"
also refers to the closing process.
Fixed Rate Mortgage -- A
mortgage loan where the interest rate is established at its origination
and continues unchanged through the life of the loan. More...
FSBO (For Sale By Owner) -- Real
Estate that is sold without the assistance of an Agent. FSBO can refer
to both the individual selling the property "They are a FSBO," or the
property itself "that house is a FSBO." More...
Foreclosure -- The process through which a lender takes back property from a defaulting owner and re-sells it.
Homeowner's Association -- An
owners group, whether in a condominium, townhouse or single family
subdivision that establishes general guidelines for the operation of
the community, as well as its standards. More...
Inspection -- A whole house inspection of a home being considered for purchase which looks for defects in the property. More...
Interest -- That portion of a mortgage payment that is the "charge" for using the lender's funds.
Lien --
A legal claim against a piece of property that can prevent it from
being sold unless the lien is satisfied (paid off). Liens can be filed
by unpaid contractors or other debtors in a legal process so that they
will be paid when a property is sold.
Listing -- A property for sale by a Real Estate Brokerage and Agent.
Loan Origination Fee -- A charge imposed by the lender, payable at closing, for processing the loan. See Points.
Lock-in -- In real estate terminology, an
agreement by the lender at the time of mortgage application or shortly
thereafter, to write the mortgage at a specific interest rate, whether
rates rise or fall up to the date of closing. Obviously a good move if
rates are rising, not so good if they are falling. Lock-ins have
specific expiration dates, such as 30, 60 or 90 days in the future.
LTV (Loan to Value) -- The ratio of the amount of the mortgage as a percentage of the value of the property.
MLS (Multiple Listing Service) --
A listing (almost always computerized) of all the properties for sale
by Real Estate Brokerages in a given geographical area.
PMI (Private Mortgage Insurance) -- Required
on virtually all conventional loans with less than 20% down payment.
Although the payments for PMI are included in your mortgage payment, it
protects the lender should you default on the loan. On FHA loans, you
will pay a MIP (Mortgage Insurance Premium) which accomplishes the same
purpose.
Points -- 1 point is equal to 1% of the loan value, paid at closing. Points can be loan origination fees
or "discount points" which reduce the interest rate of the loan (you
are actually paying a finance charge up front). When a lender, for
example, quotes a rate of 8 1/2% with 1 + 1 points, 1 point is for the
origination fee and 1 point is for the discount fee.
Prequalification -- The
first stage of a mortgage application where the lender will run a basic
credit report and determine your debt to income ratio in order to see
how much mortgage you qualify for. More...
Prepaids -- Paid for (in cash) at closing for such items as homeowners insurance for one year and real estate taxes for several months.
Principal -- The
amount borrowed for a mortgage loan. Your monthly mortgage payment will
be applied to both the interest and the principal (be assured, though,
that the lions share will go to the interest portion in the first years
of the loan).
Property Tax -- An
annual or semi-annual tax paid to one or more governmental
jurisdictions based on the amount of the property assessment. Generally
paid as part of the mortgage payment.
Recording -- The act of entering deed and/or mortgage information into public record with your local government jurisdiction.
Sub-Agent -- A Real Estate Agent who is working with a buyer but who represents the seller in the transaction. More...
Title Insurance -- Protects
your title--your ownership rights--from claims against it. Paid at
closing, title insurance may be the responsibility of the buyer, the
seller, or both, depending on what is traditional in your locality.
Warranty -- Covers
either most of the house in a new home, or selected items (for example
the heating and air conditioning system or the water heater) in a used
home. Warranties can vary widely and are optional in used homes (paid
for by either the buyer or the seller).
Zoning -- Laws
that govern specifically how a zoned area can be used. For example, an
area may be zoned for single family residential, condominiums,
commercial or retail, or a mix of two or more uses. |
