Adjustable Rate Mortgage (ARM)

A mortgage having an interest rate that can change at designated intervals, based on a financial index.

Amortization

The gradual reduction of the principal of a mortgage by scheduled installment payments.

Amortization Schedule

A schedule that shows the portions of each payment that are applied to interest and to principal. It also shows the loan balance remaining after each payment.

Annual Percentage Rate (APR)

A rate that reflects the actual annual cost of a loan, incorporating the loan interest rate, private mortgage insurance, points and fees.

Application Fee

The amount a lender charges for processing a loan application; usually nonrefundable.

Appraisal

A professional assessment of the market value of a property.

Appreciation

Increase in value of a property.

ARM

see Adjustable Rate Mortgage

Assessed Value

The value placed on a property by local officials for taxation purposes (may or may not equal appraised value).

Assumable Mortgage

A mortgage that a buyer can take over from the seller of a property.

Binder

A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate. Or, in insurance, an agreement confirming temporary coverage pending issuance of a formal policy.

Biweekly Mortgage

A mortgage in which payments are made every two weeks instead of monthly, thus making the equivalent of 13 monthly payments a year (there are 26 two-week periods) instead of 12. Allows more rapid payment of mortgage and thus less interest paid over life of the loan.

Cap

A limit set on an ARM as to how much the interest rate or monthly payments may increase.

Cash Reserve

A requirement of some lenders that the buyer have enough cash left after closing to make the first two mortgage payments.

Chattel Lien

A document indicating that personal property in addition to the real estate itself is serving as security for the loan.

Clear Title

A title to property that is free of liens and legal questions as to ownership.

Closing

The legal procedure in which the transfer of property becomes final. Also called settlement.

Closing Costs

Costs incurred by the buyer and seller in transferring ownership of a property.

Closing Statement

A statement showing the various closing costs and recording which party paid these costs. Also called settlement statement.

Commitment Letter

A lender's formal notice to a borrower that a loan has been approved; states the terms and conditions of the loan.

Condominium

A form of property ownership in which the owner holds the title to an individual dwelling plus interest in common areas of a multi-unit project.

Condo Fee (or Home Owner's Association Dues)

The monthly maintenance fee condominium unit (or planned unit development) owners must pay to cover common-area expenses.

Contingency

A condition that must be met before a contract is legally binding.

Conventional Mortgage

Any mortgage that is not insured or guaranteed by the federal government.

Convertible ARM

An adjustable rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Cooperative

A form of common property ownership in which the residents of an apartment building do not own their own units, but rather own shares in the corporation that owns the property.

Co-signer

A person who signs and assumes joint liability with another person for repayment of a debt.

Covenant

A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.

Credit Report

A report of an individual's credit history prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.

Deed

The legal document conveying title to a property.

Deed of Trust

The document used in some states instead of a mortgage.

Default

To fail to make mortgage payments on a timely basis or to comply with other mortgage conditions.

Delinquency

Failure to make a loan payment on time; the loan is not yet in default.

Deposit

Cash the buyer pays to the seller when both sign a formal sales contract.

Depreciation

A decline in property value; opposite of appreciation.

Down Payment

The part of the purchase price of a home which the buyer pays in cash up front; not included in the loan.

Earnest Money

A deposit given to the seller by the buyer when submitting an offer to show serious intent about buying a property.

Equal Credit Opportunity Act (ECOA)

A federal law prohibiting lenders from denying loans on the basis of the borrower's race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity

The difference between the market value of a property and the owner's outstanding mortgage balance; measures the degree of ownership.

Escrow

The holding of documents and money (such as a deposit) by a neutral third party prior to closing. Also an account held by the lender into which a homeowner pays money for taxes and insurance.

Fannie Mae (FNMA)

An acronym for the Federal National Mortgage Association. Fannie Mae purchases mortgage loans originated by local lenders and sets guidelines that lenders must follow to qualify prospective borrowers.

FHA Loan

A mortgage insured by the Federal Housing Administration. Down payment may be as little as 3 percent, but purchase price is limited.

Fixed Rate Mortgage

A mortgage in which the interest rate does not change during the entire life of the loan.

Flood Insurance

Insurance that will be required if a property is in a federally designated flood hazard area.

Foreclosure

The legal process by which a mortgaged property may be sold when a mortgage is in default.

Freddie Mac (FHLMC)

An acronym for the Federal Home Loan Mortgage Corporation. Another of the major purchasers of mortgages from local lenders. See also Fannie Mae.

Good Faith Estimate

A written estimate of closing costs provided by a lender within three days after someone applies for a loan.

Hazard Insurance

Insurance to protect the homeowner and lender against physical damage to property from fire, wind, vandalism and other hazards.

Home Equity Loan

A loan based on the borrower's equity in his or her home.

Homeowner's Insurance

An insurance policy that combines hazard insurance and liability coverage.

Interest

The cost of borrowing money.

Interest Rate Cap

A provision of an ARM that limits how much the interest rate can increase or decrease per adjustment period.

Lien

A legal claim against a property that must be paid when a property is sold.

Lifetime Cap

A provision of an ARM limiting the total increase in the interest rate over the life of the loan.

Loan-to-Value Ratio (LTV)

The ratio between the amount of the mortgage and the total value of the property.

Lock-in Rate

An interest rate the lender guarantees to the borrower provided the mortgage is closed within a certain time period. The borrower pays a fee for this guarantee.

Margin

The set percentage the lender adds to the index rate to determine the interest rate on an ARM (Adjustable Rate Mortgage).

Mortgage

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Note

A legal document obligating a borrower to repay a loan at a stated interest rate during a specified time period; this is secured by a mortgage.

Mortgagee

The lender in a mortgage agreement.

Mortgagor

The borrower in a mortgage agreement.

Negative Amortization

Payment terms under which the borrower's monthly payments are insufficient to cover interest due, thus increasing the loan balance.

Note

See mortgage note.

Offer to Purchase

A formal document in which a buyer proposes to buy a property for a specified amount and under certain conditions. Acceptance by the seller creates a contract binding on both parties, subject to any contingencies.

Origination Fee

A fee paid to a lender for processing a loan application, stated as a percentage of the mortgage amount, or points. Due at closing.

Owner Financing

A purchase in which the seller provides all or part of the financing for the buyer.

Payment Cap

A provision of some ARMs limiting how much the borrower's payments may increase, regardless of how much the interest rate increases.

Perc Test

A test to determine if a property is suitable for a septic tank. (Percolation test)

PITI

Stands for principal, interest, taxes and insurance - the components of a monthly mortgage payment.

Points

A one-time charge by the lender to increase the yield of a loan. Each point is equal to one percent of the loan amount. Paid at closing.

Prepayment Penalty

A fee some lenders charge to a borrower who pays off a loan before its due date.

Prequalification

The process of determining how large a loan a prospective home buyer can qualify for; this procedure is done before actually applying for the loan.

Principal

The amount originally borrowed. Also that amount of the monthly mortgage payment that reduces the outstanding balance of a mortgage.

Private Mortgage Insurance (PMI)

Insurance provided by a nongovernment insurer to protect a lender against loss if a borrower defaults. Usually required if down payment is less than 20 percent of the purchase price.

Purchase and Sale Agreement

A legal document requiring the buyer to buy and the seller to sell, under specified terms and conditions.

Real Estate Agent

A person licensed to negotiate and transact the sale of real estate; works on behalf of the seller, unless designated as a buyer's broker.

Real Estate Settlement Procedures Act (RESPA)

A federal consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Refinancing

The process of obtaining a new mortgage, usually at a lower rate, to repay and replace existing mortgage.

Right of First Refusal

An owner's promise to let someone make the first offer on a property, or to match the amount offered by another party.

Second Mortgage

An additional mortgage behind the first mortgage on a property. The rights of the second mortgage holder are subordinate to the rights of the first mortgage holder.

Seller
Take-Back

An agreement in which a property owner provides financing to a buyer. Also known as Seller Financing.

Settlement

See closing.

Survey

A drawing showing the legal boundaries of a property and the location of structures on it.

Term of a Mortgage

The length of time you are given to repay a loan.

Termite Certificate

A document certifying a property has no termites; may be required by lender.

Title

A legal document establishing the right of ownership.

Title Insurance

Insurance to protect the lender (lender's policy) or the buyer (buyer's policy) against loss arising from disputes over property ownership.

Title Search

A detailed examination of the title records to ensure that the seller of a property is the legal owner and that there are no liens or other claims outstanding.

Transfer Tax

State or local tax payable when title passes from one owner to another.

Truth in Lending

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriting

The process of evaluating a loan application to determine the lender's risk.

VA Loan

A loan guaranteed by the Department of Veterans Affairs, requiring low or no down payment.