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Glossary of Mortgage Terminology
Adjustable Rate Mortgage (ARM)
A loan in which the interest rate fluctuates up or down in relation
to a specific index and a margin agreed to in advance by the borrower
and lender
Adjustment Date
The day on which an adjustable rate mortgage may change rate or
payment. It may occur every six months, once a year, or as otherwise
agreed upon in the contract.
Amortization
Paying back a mortgage in equal installments to cover both principal
and interest.
Annual Percentage Rate
The total yearly cost of the mortgage interest stated as a percentage
of the loan amount, including; base interest rate, private mortgage
insurance, and any loan origination fees (points).
Appraisal
An estimate in writing of the market value of a property prepared
by a professional.
Appraiser
A professional qualified by education, training and experience to
render an estimated value of real property such as buildings, antiques,
automobiles, fine art or other tangible items.
Appreciation
An increase in the value of real property due to changes in the
marketplace, the opposite of depreciation.
Asset
Any item of monetary value, that may be owned by a person. An asset
may be real property, stocks, bonds, and other investment instruments
along with and enforceable claim against another person.
Assumable Mortgage
A mortgage that a buyer allows for the “take over” of
payments, (assume) when a property is transferred to a new buyer.
Assumption Clause
A provision in the property ownership contract that permits a buyer
to “assume” the responsibility for making payments while
transferring the mortgage from the seller. This sets up a situation
whereby the current loan doesn’t need to be paid in full by
the original buyer upon sale of the property
Balance Sheet
A financial statement detailing assets, liabilities and net worth
on a given date
Balloon Mortgage
A mortgage that starts with level payments for a stated period
of time that provides for a lump sum payment to be made at a specific
date or upon the end of the contract.
Binder
Sometimes referred to as a good faith deposit. It is a preliminary
agreement secured by a payment when an offer to purchase property
is being made.
Bond
And interest bearing certificate of debt. A real estate bond is
evidenced by a written deed of trust, commonly referred to as a
mortgage.
Caps
The limits set on the amount an adjustable rate mortgage may change
in any given time period. The interest rate, monthly payment or
both may be capped.
Cash-Out Refinance
A loan whereby the amount of dollars received from the new loan
actually exceeds the amount needed to repay the existing mortgage
closing costs, points etc. The additional cash may be used for any
purpose.
Certificate of Eligibility
A federal document issued to show that a veteran is eligible for
a VA (Veterans Administration) mortgage.
Certificate of Title
A document prepared by an attorney, abstract company or title company
stating the present owner is legally entitled to transfer the property
and that there are no discrepancies in ownership.
Closing
The actual event/meeting of the buyers and sellers of a property
where transfers of title to the purchaser, and the buyer makes the
full payment for the property.
Collateral
An asset which guarantees repayment of a loan
Commitment
A written promise to buy a home stating that the purchaser will
pay a specific amount for the property the interest rate they are
willing to pay and any contingencies needing to be addressed by
either party.
Construction Loan
A mortgage made for the purpose of constructing a home. The loan
is short-term, and usually paid in installments (known as a draw)
to the builder as work is completed on the structure being built.
This type of loan is replaced with permanent financing, generally
known as the end loan upon completion of the structure and issuance
of use and occupancy permits.
Contingency
This is some particular condition (s) that must be met before a
contract for sale becomes legally binding upon the parties.
Conventional Loan
Any loan not guaranteed or insured by the government.
Cost of Funds Index
This is an index used as a barometer for determining changes in
certain ARM plans.
Credit Report
A report, made by one of several of the known national credit agencies,
giving a persons credit history. This report shows payment history,
bankruptcy, foreclosures and delinquencies.
Deed
A legal document, which conveys or demonstrates title, to a real
property.
Equity
The difference between fair market value of a property and the balance
owed on the existing mortgage.
Escrow Account
An account in which a mortgage company holds funds from the borrower
to allow for payment of taxes and insurance or other assessments
against the property.
Fannie Mae
Federal National Mortgage Association, it is the nations largest
lender of home mortgage funds.
FHA
Federal Housing Authority, a part of the U.S. Dept. of Housing and
Urban Development.
FHA Loan
A mortgage insured by the Federal Housing Administration. They don’t
lend money, instead they insure repayment of the loan to the lender.
Lien
A claim against real estate or real property. Liens create clouds
against the title and prevent transfer from an owner to a purchaser.
Loan to Value Ratio
The percentage of the appraised value (or selling price, whichever
is lower) of a property that a lender is willing to loan for that
specific property.
Margin
An amount, calculated in points (a percentage) that a lender add
to an index to determine how much interest you will pay during a
specified period for an ARM loan.
Personal Property
Any item of property, which does not transfer with the land. Think
of these as items one is able to be remove relatively easily.
Points
Points are stated as a percentage of the mortgage amount. Think
of it as interest paid in advance, which often help obtain a lower
overall interest rate for the life of the loan, in many cases points
are tax deductible.
PITI
An acronym for Principle, Interest, Taxes and Insurance, these are
the major parts of your monthly mortgage payment.
PMI – Private Mortgage Insurance
This is insurance which protects the lender in the event a purchaser
defaults on the mortgage. PMI is normally required on a loan that
exceeds 80% loan to value ratio. It should not be confused with
personal life insurance policy that provides coverage in the event
of death.
RESPA
An acronym for Real Estate Settlement Procedures Act. This act requires
that a lender provide specific information to a purchaser as to
the cost of securing financing. This is often referred to as the
HUD-1.
Title
Evidence that a person or persons are in fact the lawful owners
of real property.
VA Loan
A mortgage that is guaranteed by the Veterans Administration. The
VA guarantees only a small portion of the loan amount. The government
does not advance any funds, this is a mortgage made by a private
lender.
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