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Real Estate Terms
Adjustable-Rate
Mortgage (ARM): A loan on which the monthly payments will increase or
decrease over time, based on changes in the ARM's interest rate index. ARM
payments typically are adjusted every six months or once a year. Common indices
to which ARMs are tied include the 11th District Cost of Funds, one-year T-note
and six-month T-bill.
Amortization:
The gradual repayment of a mortgage through monthly (e.g., installment)
payments. In the early years of a mortgage, most of the monthly payment goes
toward interest. Later in the mortgage, more of the payment goes toward reducing
the loan's principal balance.
Annual Percentage Rate (APR): The annual cost
of a mortgage, including interest, loan fees and other costs, stated as a
percentage of the loan amount.
Appraisal/Appraised Value: An opinion of the market value of a home
expressed by a real estate appraiser.
Arbitration:
The term used to describe a form of dispute resolution that occurs
outside of the court system. Basically, arbitration is a dispute resolution
system where the parties submit arguments and evidence to a neutral person, know
as the arbitrator, who then renders a decision, called an award, based upon the
evidence and arguments presented. (more...)
Caps:
Provisions of an ARM limiting how much the interest rate can change at each
adjustment period (e.g., every six months, once a year) or over the life of the
loan (rate cap). A payment cap limits how much the payment due on the loan can
increase or decrease.
Closing:
The meeting at which a home sale is finalized. The buyer signs the mortgage,
pays closing costs and receives title to the home. The seller pays closing costs
and receives the net proceeds from the home sale.
Closing Costs:
Expenses in addition to the price of the home incurred by buyers and sellers
when a home is sold. Common closing costs include escrow fees, title insurance
fees, document recording fees and real estate commissions.
Conventional
Mortgage: A loan not guaranteed, insured or made by the federal or
state government.
Debt-To-Income
(DTI) Ratio: The ratio of monthly debt payments to monthly gross
income. Lenders use a housing DTI ratio (house payment divided by monthly
income) and a total DTI ratio (total debt payments including the house payment
divided by monthly income) to determine whether a borrower's income qualifies
him or her for a mortgage.
Deed: A legal document conveying ownership of
property.
Down payment:
The portion of the home's purchase price the buyer pays in cash.
Earnest Money:
The deposit given by a buyer to a seller to show that the buyer is serious about
purchasing the home. Earnest money usually is refundable to homebuyers in the
event a contingency of the sales contract cannot be met.
Equity:
The difference between a home's value and the mortgage amount owed on the
home.
Escrow:
The holding of documents and money by a neutral third party prior to
closing.
Fannie Mae
(the Federal National Mortgage Association) and
Freddie Mac (the Federal Home Loan Mortgage Corporation): Government-sponsored, privately owned entities
which purchase mortgages from lenders and turn the mortgages into securities
which are bought by investors. Fannie Mae and Freddie Mac are the key secondary
mortgage market agencies.
Fixed-Rate
Mortgage (FRM): A loan on which the interest rate and monthly payment
do not change.
Hazard Insurance:
A policy which protects against the damage to a property caused by
fire, wind or other hazards.
Homeowner's
Warranty: A policy that covers certain repairs (e.g., plumbing or
heating) of a newly purchased home for a certain period of time.
Impound Account:
An account established by a lender to collect a borrower's property
tax and insurance payments. Impound accounts are normally required on mortgages
with down payments of 10 percent or less.
Loan-To-Value
(LTV) Ratio: The ratio of the amount of money owed on a home to the
home's value. The LTV ratio for a $100,000 home financed with a $90,000 mortgage
would be 90 percent, for example.
Mediation:
A process used to resolve disputes. In mediation, the parties to the dispute are
assisted by a neutral third person called a mediator. The mediator is not
empowered to impose a settlement or decision on the parties, rather the mediator
facilitates discussions and negotiation between the parties with the goal of
assisting the parties in reaching a mutually acceptable settlement of their
dispute. (more...)
Mortgage Banker:
A company which originates mortgages for sale into the secondary mortgage market
(e.g., to Fannie Mae and Freddie Mac).
Mortgage Broker:
An individual or company that arranges mortgage financing between a
borrower and a lender.
Mortgage Interest
Deduction: The ability of mortgage borrowers to deduct the interest
paid on a home loan for purposes of federal and state income taxes.
Origination Fee:
A fee charged by a lender for making a mortgage.
PITI: Principal, interest,
taxes and insurance -- the primary components of a monthly mortgage payment.
Points:
One point equals 1 percent of the mortgage amount. Points are charged by lenders
to increase the lender's return on the mortgage. Typically, lenders may charge
anywhere from zero to two points. Loan points are tax deductible.
Principal:
The loan amount borrowed or still owed.
Private Mortgage Insurance (PMI):
Insurance issued by private insurers which protects lenders against a loss if a
borrower defaults on a mortgage with a low down payment (e.g., less than 20
percent).
REALTOR¨:
A real estate broker or agent who, as a member of a local Board of
REALTORS¨, a state association of REALTORS¨ and the NATIONAL ASSOCIATION OF
REALTORS¨, adheres to high standards of professionalism and a strict code of
ethics.
Seller Financing:
A financing agreement in which a seller provides part (or all) of the financing
needed by a buyer to purchase the seller's home.
Title:
A legal document establishing the right of ownership of a property.
Title
Insurance: Insurance to protect the buyer and lender against losses
arising from disputes over the ownership of a property.
Underwriting:
The process of evaluating a loan application to determine if it meets
the lender's standards.
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