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Real Estate Terminology
ANNUAL PERCENTAGE RATE:
The actual finance charge for a loan, including points, fees and the actual
interest rate.
AMORTIZATION:
A method of equalizing the monthly mortgage payment over the life of the loan
by adjusting the proportion of principal to interest over time. At first, the
interest payment is high and the principal payment is low. At the end of the
loan, interest payments are low and principal payments are high.
APPRAISAL:
A professional opinion as to the value of a home and property.
ARM (Adjustable Rate Mortgage): Interest rate are periodically adjusted up or
down over the life of the loan based on a specified financial index. The plan
may have rate or interest "caps" that limit the amount your interest
rate may change. An ARM generally carries a lower initial rate than fixed-rate
loans because it moves with the market.
ASSESSED VALUE:
The value placed on a property by a municipality for the purpose of levying
taxes. The municipality's assessed value may greatly differ from the appraised
value.
ASSUMABLE:
Describes a mortgage that can be assumed or taken over by a new owner if you
decide to sell your home. Be sure to check with your lender first to make sure
the new buyer is an acceptable credit risk. Not all mortgages are assumable.
BALLOON PAYMENT:
A large principal payment due all at once at the pre-determined end date of
some loans.
BUYDOWN:
A sum of money sufficient to "buy" or obtain a lower than market
interest rate from a lender. It can be viewed as prepaid interest in exchange
for lower monthly payments.
CAP:
A limit on how much an adjustable interest rate can change in an Adjustable
Rate Mortgage loan.
CERTIFICATE OF TITLE:
A notarized document signed by a title examiner certifying that a seller's
ownership documents are recorded.
CLOSING:
The legal transfer of the deed to a property from the seller to the buyer
signifying the change in ownership.
CLOSING (OR SETTLEMENT) COSTS:
All costs, other than the loan origination fee, paid by the seller or buyer
when the loan is finalized. This may include such items as title search and
examiner fees, lawyer's fees, title insurance premiums, deed recording fee and
transfer tax.
COMMISSION:
A percentage of the real estate transaction paid to an agent or broker for
their services.
COMPARATIVE MARKET ANALYSIS (CMA):
A survey of comparable homes recently sold or currently on the market used to
help determine a fair market value for a seller's property.
CONTINGENCY:
A condition put in a contract that must be met for the contract to be binding.
CONVENTIONAL LOAN:
Any loan not insured or guaranteed by a government agency. (Refers to loans
made by institutional lenders.)
CONVERTIBLE:
Means the ARM loan can be changed to a conventional fixed-rate loan. Conversion
often involves a fee. Not all ARM loans are convertible.
DEED:
A legal document that conveys ownership of a property from seller to buyer.
DISCLOSURE STATEMENT:
Detailed explanation of the specific loan for which you are applying. It is a
vehicle used to satisfy questions about the conditions of the mortgage
contract.
DISCOUNT POINTS:
The fees paid to obtain a loan. Each point is one percent of the total loan
amount.
DOWN PAYMENT:
A percentage of the purchase price that a buyer must pay to the seller and
which may not be borrowed from a financial institution.
DUE-ON-SALE:
A clause in a mortgage providing that if the mortgagee sells, transfers, or in
any way encumbers the property, the mortgagor has the right to implement the
acceleration clause, making the balance of the obligation due.
ESCROW:
A third party, acting as the agent for the buyer and seller, carries out
instructions of both and assumes the responsibilities of handling all paperwork
and disbursement of funds.
FHLMC:
The Federal Home Loan Mortgage Corporation, or "Freddie Mac," is a
government agency that performs a function similar to that of FNMA
("Fannie Mae"). FHLMC issues its own mortgage-backed securities,
which are backed by the conventional mortgages it purchases. While FNMA
emphasizes the purchase of mortgage loans, FHLMC also actively sells the loans
from its portfolio, thus acting as a conduit for mortgage investments.
FIXTURE:
Something that is permanently attached to a property and belongs with the
property when it is sold, such as a light fixture, air conditioner etc.
GNMA:
The Government National Mortgage Association, or "Ginnie Mae," is a
government agency supervised by HUD. At the time of its creation GNMA, in
effect, replaced FNMA when FNMA became privately owned. A primary function of
GNMA is to promote investment by guaranteeing the payment of principal and
interest on FHA and VA mortgages. It carries out this function through its
mortgage-backed securities program.
HUD:
Housing and Urban Development Agency.
INDEX:
The interest rate indicator used to determine changes in the mortgage rate. An
index reflects current economic conditions and is published regularly for use
by lenders. Popular indexes are Treasury bills and Treasury securities.
INITIAL RATE:
The interest rate at which your loan begins.
INTEREST ADJUSTMENT:
Prepaid daily interest to the end of the month from date of closing so that all
future payments will fall on the first of each month.
LIEN:
A debt or security claim on property that must be paid prior to sale.
MARGIN:
The amount or percentage that is added to the index at each time of adjustment
to determine the new interest rate paid by the borrower. The margin remains the
same throughout the life of the loan. The permanent formula for rate adjustment
is index + margin = borrower's rate.
MARKET PRICE:
The actual price at which a property is sold.
MARKET VALUE:
The price as established by home condition, economic conditions, location, and
general trends.
MULTIPLE LISTING SERVICE (MLS):
A system that provides members detailed information about most properties for
sale in a given market.
NEGATIVE AMORTIZATION:
A loan payment schedule that increases rather than decreases the outstanding
principal balance, because the payments do not cover the full amount of
interest due (deferred interest). The unpaid interest is then added to the
principal.
NOTE RATE:
The interest rate recorded on the legal document that describes how your loan
will be repaid. In the event of a buydown, for example, the rate you actually
pay will differ from the note rate.
ORIGINATION FEE:
An application fee for processing a proposed mortgage loan.
PAYMENT CAP:
A limit on the amount or percentage that a payment can change at any one time
of adjustment. Not all loans have a payment cap.
PITI:
An acronym for Principle; Interest; Taxes & Insurance, which forms the
basis for a monthly mortgage payment.
PMI (Private Mortgage Insurance):
Insurance written by a private company protecting the lender against loss due
to a mortgage default. It is known as MIP for FHA loans.
POINT: Synonym for one percent. "Points" may be charged as part of a
mortgage, in addition to interest and fees.
PREPAYMENT PENALTY:
A fee paid by a borrower who pays off the loan before it is due.
PRINCIPLE: The amount of money borrowed, for which interest is charged. Also,
one of the parties to a contract.
PROBATE:
To divide or assess proportionately.
QUALIFYING RATE:
The interest rate at which you can afford payments and thereby qualify for a
loan. This is determined by the lending agency.
RATE CAP:
A limit on the interest rate which determines loan payments. Rate caps do not
create deferred interest. They are offered less frequently than payment caps
because they involve a greater risk for lenders.
RATE LOCK-IN:
An interest rate which is guaranteed to remain the same from the time of your
loan application through the time your loan is approved. Whether your loan's
index rises or falls during that period, you pay the rate which was current at
the time of application. Not all loan applications include a rate lock-in
clause.
RESERVE FUND:
Monies set aside for future payment of items (taxes, insurance, PMI, etc.),
sometimes referred to an impound account.
SECOND LOAN:
An additional loan imposed on top of the first mortgage when the buyer needs
more money. The risk to the lender is greater because it is subordinate to the
first loan; therefore, the interest rate is higher and conditions more
stringent. Typically "carried" by the seller when the buyer cannot
qualify for the entire loan amount.
SETTLEMENT:
All financial transactions required to make the contract final.
TERM OF LOAN: The length of time you have to pay back your loan. The term of
most loans is 30 years.
TIME OF ADJUSTMENT:
Defines how often the mortgage interest rate and/or monthly payment can be
changed. Once the rate and payment are set they cannot be altered until the
next time of adjustment. Interest rate and payment adjustments can be scheduled
to change at different times. With some ARMs the interest rate changes more
often than the size of the monthly payment.
TITLE:
A document that indicates ownership of a specific property.
Title Search: A detailed examination of the entire document history of a
property title to make sure that there are no legal encumbrances.
WRAPAROUND:
The seller keeps the original low-rate mortgage. The buyer makes payments to
the seller, who forwards a portion to the lender holding the original mortgage.
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