Glossary

The following is a list of definitions that will help you ask the right questions and compare information when you are shopping for a mortgage loan.

Add-On-Rate

A type of loan repayment schedule that breaks the principal into equal installments. The interest payment is added on to the principal. Total monthly payments are high in the beginning but, over time, the interest payment is reduced as the principal balance is reduced.

Adjustable Rate Mortgage

(ARM) Interest rates on this type of mortgage are periodically adjusted up or down, depending on a specified financial index.

Agent

Acts on behalf of another, representing that person's interests and serving as an intermediary.

Amortization

A method of equalizing monthly mortgage payments over the life of the loan, even though the proportion of principal to interest changes over time. In the early part of the loan, principal repayment is very small and interest repayment very high; at the end of the loan, that relationship is reversed.

Annual Percentage Rate

(APR) The actual finance charge for a loan, including points and loan fees, in addition to the stated interest rate.

Appraisal

An expert opinion of the value or worth of a property.

Assumption of Mortgage

Buyer assumes liability for an existing mortgage note held by the seller. This is usually subject to approval by the lender, who must be willing to approve the buyer and release the seller.

Assessed Value

The value placed on property by a municipality for purposes of levying taxes. It may differ widely from appraised or market value.

Balloon Payment

A large principal payment due all at once at the end of some loan terms.

Binder

Small but serious amount of money ($100-$1000) accompanying an offer to buy, along with a brief written agreement to go to contract for the sale of property.

Broker

A real estate professional who has a higher level of training than an agent. Generally, this is one who is the legal representative or proprietor of the office.

Buydown Mortgage Loan

With this type of loan, either the seller or the buyer can pay additional discount points to "buy down" the starting rate of the loan to a rate below the average market rate. In a buydown mortgage, the interest rate steps up slightly the second year and again the third. The rate then remains fixed for years 3-30. Many first time homebuyers look for this type of loan, particularly when the seller is willing to "buy down" the rate.

Cap

Limit on how much the interest rate can change in an adjustable rate mortgage (ARM).

Certificate of Title

A document, signed by a title examiner, stating that a seller has an insurable title to the property.

Closing

The meeting where the deed to the property is legally transferred from seller to buyer. Also known as settlement.

Closing Costs

Also known as settlement costs, these are the fees associated with obtaining the loan that are incurred by both the buyer and the seller. These costs typically include attorney's fees, loan origination fees, credit reports, appraisal, state taxes, title insurance, recording fees and other miscellaneous expenses.

Commission

Fee (usually a percentage of total transaction) paid to an agent or broker for services performed.

Comparative Market Analysis (CMA)

A survey of attributes and selling prices of comparable houses on the market or recently sold; used to help determine correct pricing strategy for a seller's property.

Condominium (Condo)

Type of real estate ownership where the owner has title to a specific unit and shared interest in common areas.

Contract

Binding legal agreement between two or more parties that outlines the conditions for the exchange of value (for example; money exchanged for title to property).

Conversion Clause

A provision that allows converting an ARM to a fixed rate loan after a specified interval.

Credit Rating

An evaluation of ability to to repay a loan. It is based on the borrower's current financial situation as well as past performance in debt repayment, taking into account any defaults, and history of slow or delinquent payments.

Deed

Legal document that formally conveys ownership of property from seller to buyer.

Discount Points

Sometimes referred to simply as points, a discount point is an amount equal to 1% of the principal amount of the loan given by the seller or buyer to the provider of the mortgage. These points are a one-time charge assessed at closing. Points are typically used to "buy down" the interest rate for the life of the loan.

Down Payment

Percentage of the purchase price that the buyer must pay in cash and may not borrow from the lender. The down payment plus the loan amount make up the total purchase price of the house. The down payment is made at the time of closing, and is usually obtained from funds provided by the buyer or the next proceeds from the sale of the buyer's previous residence. The amount of down payment required will vary with the type of loan.

Earnest Money Deposit

This is the amount of money given by the buyer at the time of signing the sales contract to show good faith in going through with the purchase. It is usually placed in escrow by the Realtor/Builder and is used as part of the down payment.

Equity

The value of the property actually owned by the homeowner: purchase price, plus appreciation, plus improvements, less mortgages and liens.

Escrow

A fund or account held by a third-party custodian until conditions of a contract are met.

Federal Home Loan Mortgage Corporation

(FHLMC, called "Freddie Mac") A private corporation authorized by Congress. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal and interest guaranteed by the federal government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchase of mortgages.

Federal National Mortgage Association

(FNMA, called "Fannie Mae";) Privately owned corporation created by Congress that buys mortgage notes from local lenders and is responsible for the guidelines a majority of lenders use to qualify borrowers.

Finance Charge

The total cost, including all fees, points and interest payments a borrower pays to obtain credit.

Fixed Rate Mortgage

Interest rates on this type of mortgage remain the same over the life of the loan term. Compare to Adjustable Rate Mortgage.

Fixture

A recognizable entity (such as a toilet bowl, kitchen cabinet, or light unit) that is permanently attached to property and belongs to the property when it is sold.

Float Down

An option agreed upon in the terms of the mortgage giving the borrower a one-time chance to change to a lower interest rate should the market change between the time of locking and the time of closing.

Graduated Payment Mortgage

Monthly payments start low and increase at a predetermined rate. Compare to Adjustable Rate Mortgage (ARM).

Hazard Insurance

Compensates for property damage from specified hazards such as fire and wind. More complete coverage is given by all-risk homeowner's insurance.

Home Inspection Report

Prepared by a qualified inspector, it evaluates a property's structure and mechanical systems.

Interest

The cost of borrowing money, usually expressed as a percentage over time.

Joint Tenancy

An equal undivided ownership of property by two or more persons, the survivors to take the interest upon the death of any one of them.

Lien

A security claim on property until a debt is satisfied.

Listing Contract

Agreement whereby an owner engages a real estate company for a specified period to sell property, for which upon sale the agent receives a commission.

Market Value

The price that is established by present economic conditions, location, and general trends.

Market Price

The actual price at which a property sold.

Mortgage

Security claim by a lender against property until the debt is paid.

Mortgage Insurance

This insurance is often required when there is a down payment of less than 20% on a conventional (fixed rate) loan. The mortgage insurance protects the lender in the event of loss through foreclosure.

Multiple Listing Service (MLS)

A system that provides to its members detailed information about properties for sale.

Negative Amortization

When monthly payments aren't enough to cover interest costs, they are added to the principal balance, and you may end up owing more than when you started. This is most likely to occur with ARMs that have payment caps.

Origination Fee

Application fee(s) for processing a proposed mortgage loan.

PITI

This represents the total monthly payment including Principal, Interest, Taxes and Insurance the borrower(s) will be paying the lender.

Point

One percent of the loan principal which is charged in addition to interest and fees.

Prepayment Penalty

A fee paid by a borrower who pays off the loan before it is due.

Prequalification

Informal estimate of how much financing a potential borrower might expect to obtain. Done before paying substantial loan application fees.

Principal

The amount of money borrowed, for which interest is charged; or, one of the parties to a contract.

Prorate

Divide or assess proportionately, as in the case of daily interest accrued prior to closing.

Purchase Agreement

see Contract.

Qualifying Income Ratio

Used by lenders to decide whether to offer an individual a loan. One kind compares only the amount of the proposed monthly mortgage payment to the monthly income. Another compares the amount of all monthly obligations to the monthly income.

Realtor

An individual who is licensed to both buy and sell real estate in an area and who is a member of the National Association of Realtors.

Refinancing

The repayment of a debt from the proceeds of a new loan using the same property as security.

RESPA Statement

(Real Estate Settlement Procedures Act) A precise breakdown of closing costs for both sellers and buyers.

Revolving Debt

An arrangement for credit in which the customer receives purchases or services on an ongoing basis prior to payment. Repayment is usually at regular intervals but not for a specified amount or term, i.e. charge cards.

Seasoned Mortgage

A mortgage that has been closed for more than one year.

Secondary Mortgage Market

A market where existing mortgages are bought and sold. It differs from the primary mortgage market where mortgages are originated.

Servicing

The obligations of the mortgage banker as a loan correspondent as designated in the servicing arrangement for which a fee is received. The collection for an investor of payments, interest, principal, and trust items such as hazard insurance and taxes, on a note by the borrower in accordance with the stipulations of the note. Servicing also consists of operational procedures covering accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency, delinquency loan follow-up and loan analysis.

Settlement or Closing

This is the time when all documents are signed after review and title is actually transferred from seller to buyer.

Table Fund

The use of money on deposit to fund a loan at closing.

Title

Document that indicates ownership of a specific property.

Title Insurance

A contract by which the insurer, usually a title insurance company, agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest as owner, mortgage lender, or otherwise. This type of insurance is required by lenders to protect them against deficient title. The buyer also has the option to purchase an owner's title insurance policy at the settlement table to protect his own interest.

Title Search

An examination of public records, laws and court decisions to disclose the past and current facts regarding ownership of real estate. This ensures that the current owners have no liens or judgments presently on the home.

Underwriting

The process of approving or denying a loan based on a review of the property and the applicant's ability to repay the loan. The underwriter analyzes the risks involved and selects an appropriate loan term and interest rate.

VA Mortgage

A mortgage that is guaranteed by the Department of Veterans Affairs. Veterans Administration is an independent agency of the federal government created to administer a variety of benefit programs designed to facilitate the adjustment of returning veterans to civilian life. The VA home loan guaranty program is designed to encourage lenders to offer long term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss.

Variable Rate Mortgage

A mortgage agreement that allows for adjustment of the interest rate in keeping with the fluctuating market and terms agreed on in the note.

Warranty Deed

A deed in which the grantor or seller warrants or guarantees that good title is being conveyed, as opposed to a quitclaim deed that contains no representation, or warranty as to the quality of title being conveyed.

Yield

Ratio of income from an investment to total cost of the investment over a given period of time. Return on investment.