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When you start shopping for a new home, you may encounter some words and terms
with which you are unfamiliar. The following glossary will help you to be a
better informed shopper.
Adjustable Rate Mortgage (ARM) - A loan
whose interest rate is adjusted according to movements in the financial
market.
Amortization - A payment plan by which a borrower reduces
a debt gradually through monthly payments of principal and
interest.
Annual Percentage Rate (APR) - The annual cost off
credit over the life of a loan, including interest, service charges, points,
loan fees, mortgage insurance, and other items.
Appraisal - An
evaluation to determine what a piece of property would sell for in the
marketplace.
Appreciation - The increase in the value of a
property.
Assessment - A tax levied on a property or a value
placed on the worth of property by a taxing authority.
Assumption
- A transaction allowing the buyer of a home to assume responsibility for an
existing loan on the home instead of getting a new loan.
Balloon -
A loan which has a series of monthly payments (often for 5 years or less) with
the remaining balance due in a large lump sum payment at the
end.
Binder - A receipt for a deposit paid to secure the right to
purchase a home at terms agreed upon by the buyer and
seller.
Buydown - A subsidy (usually paid by a builder or
developer) to reduce the monthly payments on a mortgage loan.
Cap
- A limit to the amount an interest rate or a monthly payment can increase for
an adjustable rate loan either during an adjustment period or over the life of
the loan.
Certificate of Occupancy - A document from an official
agency stating that the property meets the requirements of local codes,
ordinances, and regulations.
Closing - A meeting to sign documents
which transfer property from a seller to a buyer. (Also called
settlement)
Closing Costs - Charges paid at settlement for
obtaining a mortgage loan and transferring real estate
title.
Conditions, Covenants, and Restrictions (CC and Rs) - The
standards that define how a property may be used and the protections the
developer has made for the benefit of all owners in a
subdivision.
Condominium - A home in a multi-unit complex; each
purchaser owns an individual unit, and all the purchasers jointly own the common
areas, such as the surrounding land, hallways, etc.
Conventional
Loan - A mortgage loan not insured by a government agency (such as FHA or
VA).
Convertibility - The ability to change a loan from an
adjustable rate schedule to a fixed rate schedule.
Cooperative -
A form of ownership in a multi-unit complex; the purchasers own shares of the
entire complex rather than owning individual units.
Credit Rating
- A report ordered by a lender from a credit bureau to determine if the borrower
is a good credit risk.
Default - A breach of a mortgage contract
(such as not making monthly payments).
Density - The number of
homes built on a particular acre of land. Allowable densities are usually
determined by local jurisdictions.
Downpayment - The difference
between the sales price and the mortgage amount on a home. The downpayment is
usually paid at closing.
Due-on-Sale - A clause in a mortgage
contract requiring the borrower to pay the entire outstanding balance upon sale
or transfer of the property. A mortgage with a due-on-sale clause is not
assumable.
Earnest Money - A sum paid to the seller to show that
a potential purchaser is serious about buying.
Easement -
Right-of-way granted to a person or company authorizing access to the owner's
land; for example, a utility company may be grated an easement to install pipes
or wires. An owner may voluntarily grant an easement, or in some cases, be
compelled to grant one by a local jurisdiction.
Equity - The
difference between the value of a home and what is owed on it.
Escrow - The handling of funds or documents by a third party on
behalf of the buyer and/or seller.
Federal Housing Administration
(FHA) - A federal agency which insures mortgages that have lower downpayment
requirements than conventional loans.
Fixed Rate Mortgage - A
mortgage whose interest rate remains constant over the life of the loan. The
payments are not necessarily level. (See Graduated Payment Mortgage and Growing
Equity Mortgage).
Fixed Schedule Mortgage - A mortgage whose
payment schedule for the life of the loan is established at closing. The
payments and interest rate are not necessarily level.
Graduated
Payment Mortgage (GPM) - A fixed-rate, fixed-schedule loan which starts with
lower payments than a level payment loan; the payments rise annually over the
first 5 to 10 years and then remain constant for the remainder of the loan. GPMs
involve negative amortization.
Growing Equity Mortgage (Rapid Payoff
Mortgage) - A fixed-rate, fixed-schedule loan which starts with the same
payments as a level payment loan; the payments rise annually, with the entire
increase being used to reduce the outstanding balance. No negative amortization
occurs, and the increase in payments may enable the borrower to pay off a
30-year loan in 15 to 20 years, or less.
Hazard Insurance -
Protection against damage caused by fire, windstorm, or other common hazards.
Many lenders require borrowers to carry it in an amount at least equal to the
mortgage.
Housing Finance Agency - A state agency which offers a
limited amount of below-market-rate home financing for low-and moderate-income
households.
Index - The interest rate or adjustment standard which
determines the changes in monthly payments for an adjustable rate
loan.
Infrastructure - The public facilities and services needed
to support residential development, including highways, bridges, schools, and
sewer and water systems
Interest - The cost paid to a lender for
the use of borrowed money.
Joint Tenancy - A form of ownership by
which the tenants own a property equally. If one dies, the other would
automatically inherit the entire property.
Level Payment Mortgage
- A mortgage whose payments are identical for each month over the life of the
loan.
Mortgage Broker - A broker who represents numerous lenders
and helps consumers find affordable mortgages; the broker charges a fee only if
the consumer finds a loan.
Mortgage Commitment - A formal written
communication by a lender, agreeing to make a mortgage loan on a specific
property, specifying the loan amount, length of time and
conditions.
Mortgage Company (Mortgage Banker) - A company that
borrows money from a bank, lends it to consumers who want to buy homes, then
sells the loans to investors.
Mortgagee - The lender who makes a
mortgage loan.
Mortgage Loan - A contract in which the borrower's
property is pledged a s collateral and which can be repaid in installments over
a long period. The mortgagor (buyer) promises to repay principal and interest,
to keep the home insured, to pay all taxes, and to keep the property in good
condition.
Mortgage Origination Fee - A charge by a lender for the
work involved in preparing and servicing a mortgage application (usually 1
percent of the loan amount).
Negative Amortization - An increase
in the outstanding balance of a loan when a monthly payment is not large enough
to cover all of the interest due.
Note - A formal document showing
the existence of a debt and stating the terms of repayment.
PITI -
Principal, interest, taxes, and insurance (the 4 major components of monthly
housing payments).
Point - A charge of 1 percent of the mortgage
amount. Points are a one-time charge assessed by the lender at closing to
increase the interest yield on a mortgage loan.
Prepayment -
Payment of all or part of a debt prior to its maturity.
Principal
- The amount borrowed in a loan, excluding interest and other
charges.
Property Survey - A survey to determine the boundaries of
your property. The cost will depend on the complexity of the
survey.
Rapid Payoff Mortgage - (See Growing Equity
Mortgage).
Recording Fee - A charge for recording the transfer of
a property, paid to a city, county, or other appropriate branch of
government.
Real Estate Settlement Procedures Act (RESPA) - A
federal law requiring lenders to provide home buyers with information about
known or estimated settlement costs. The act also regulates other aspects of
settlement procedures.
R-Value - The resistance of insulation
material (including windows) to heat passing through it. The higher the number,
the greater the insulating value.
Sales Contract - A contract
between a buyer and seller which should explain, in detail, exactly what the
purchase includes, what guarantees there are, when the buyer can move in, what
the closing costs are, and what recourse the parties have if the contract is not
fulfilled or if the buyer cannot get a mortgage commitment at the agreed-upon
terms.
Settlement - (See Closing).
Shared Appreciation
Mortgage - A loan in which partners agree to share specified portions of the
downpayment, monthly payment, and appreciation.
Tenancy in Common
- A form of ownership in which the tenants own separate but equal parts. To
inherit the property, a surviving tenant would either have to be mentioned in
the will or, in the absence of a will, be eligible through state inheritance
laws.
Title - Evidence (usually in the form of a certificate or
deed) of a person's legal right to ownership of a property.
Transfer
Taxes - Taxes levied on the transfer of property or on real estate loans by
state and/or local jurisdictions.
Veterans Administration (VA) - A
federal agency which insures mortgage loans with very liberal downpayment
requirements for honorably discharged veterans and their surviving
spouses.
Walk-Through - A final inspection of a home before
settlement to search for problems that need to be corrected before ownership
changes hands.
Warranty - A promise, either written or implied,
that the material and workmanship of a product is defect-free or will meet a
specified level of performance over a specified period of time. Written
warranties on new homes are either backed by insurance companies or by the
builders themselves.
Zoning - Regulations established by local
governments regarding the location, height, and use for any given piece of
property within a specific area.
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