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Glossary A - C
• A • B • C
acceleration clause
A clause in
your mortgage which allows the lender to demand payment of the outstanding loan
balance for various reasons. The most common reasons for accelerating a loan are
if the borrower defaults on the loan or transfers title to another individual
without informing the lender.
adjustable-rate mortgage (ARM)
A
mortgage in which the interest changes periodically, according to corresponding
fluctuations in an index. All ARMs are tied to indexes.
adjustment
date
The date the interest rate changes on an adjustable-rate mortgage.
amortization
The
loan payment consists of a portion which will be applied to pay the accruing
interest on a loan, with the remainder being applied to the principal. Over
time, the interest portion decreases as the loan balance decreases, and the
amount applied to principal increases so that the loan is paid off (amortized)
in the specified time.
amortization schedule
A table which
shows how much of each payment will be applied toward principal and how much
toward interest over the life of the loan. It also shows the gradual decrease of
the loan balance until it reaches zero.
annual percentage rate
(APR)
This is not the note rate on your loan. It is a value created
according to a government formula intended to reflect the true annual cost of
borrowing, expressed as a percentage. It works sort of like this, but not
exactly, so only use this as a guideline: deduct the closing costs from your
loan amount, then using your actual loan payment, calculate what the interest
rate would be on this amount instead of your actual loan amount. You will come
up with a number close to the APR. Because you are using the same payment on a
smaller amount, the APR is always higher than the actual not rate on your loan.
application
The
form used to apply for a mortgage loan, containing information about a borrowers
income, savings, assets, debts, and more.
appraisal
A
written justification of the price paid for a property, primarily based on an
analysis of comparable sales of similar homes nearby.
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appraised
value
An opinion of a property's fair market value, based on an
appraiser's knowledge, experience, and analysis of the property. Since an
appraisal is based primarily on comparable sales, and the most recent sale is
the one on the property in question, the appraisal usually comes out at the
purchase price.
appraiser
An individual qualified by
education, training, and experience to estimate the value of real property and
personal property. Although some appraisers work directly for mortgage lenders,
most are independent.
appreciation
The increase in the
value of a property due to changes in market conditions, inflation, or other
causes.
assessed value
The valuation placed on property by
a public tax assessor for purposes of taxation.
assessment
The
placing of a value on property for the purpose of taxation.
assessor
A
public official who establishes the value of a property for taxation purposes.
asset
Items
of value owned by an individual. Assets that can be quickly converted into cash
are considered "liquid assets." These include bank accounts, stocks,
bonds, mutual funds, and so on. Other assets include real estate, personal
property, and debts owed to an individual by others.
assignment
When
ownership of your mortgage is transferred from one company or individual to
another, it is called an assignment.
assumable mortgage
A
mortgage that can be assumed by the buyer when a home is sold. Usually, the
borrower must "qualify" in order to assume the loan.
assumption
The
term applied when a buyer assumes the sellers mortgage.
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balloon mortgage
A mortgage loan that requires the
remaining principal balance be paid at a specific point in time. For example, a
loan may be amortized as if it would be paid over a thirty year period, but
requires that at the end of the tenth year the entire remaining balance must be
paid.
balloon payment
The final lump sum payment that is
due at the termination of a balloon mortgage.
bankruptcy
By
filing in federal bankruptcy court, an individual or individuals can restructure
or relieve themselves of debts and liabilities. Bankruptcies are of various
types, but the most common for an individual seem to be a "Chapter 7 No
Asset" bankruptcy which relieves the borrower of most types of debts. A
borrower cannot usually qualify for an "A" paper loan for a period of
two years after the bankruptcy has been discharged and requires the
re-establishment of an ability to repay debt.
bill of sale
A
written document that transfers title to personal property. For example, when
selling an automobile to acquire funds which will be used as a source of down
payment or for closing costs, the lender will usually require the bill of sale
(in addition to other items) to help document this source of funds.
biweekly
mortgage
A mortgage in which you make payments every two weeks instead
of once a month. The basic result is that instead of making twelve monthly
payments during the year, you make thirteen. The extra payment reduces the
principal, substantially reducing the time it takes to pay off a thirty year
mortgage. Note: there are independent companies that encourage you to set up
bi-weekly payment schedules with them on your thirty year mortgage. They charge
a set-up fee and a transfer fee for every payment. Your funds are deposited into
a trust account from which your monthly payment is then made, and the excess
funds then remain in the trust account until enough has accrued to make the
additional payment which will then be paid to reduce your principle. You could
save money by doing the same thing yourself, plus you have to have faith that
once you transfer money to them that they will actually transfer your funds to
your lender.
bond market
Usually refers to the daily buying
and selling of thirty year treasury bonds. Lenders follow this market intensely
because as the yields of bonds go up and down, fixed rate mortgages do
approximately the same thing. The same factors that affect the Treasury Bond
market also affect mortgage rates at the same time. That is why rates change
daily, and in a volatile market can and do change during the day as well.
bridge
loan
Not used much anymore, bridge loans are obtained by those who have
not yet sold their previous property, but must close on a purchase property. The
bridge loan becomes the source of their funds for the down payment. One reason
for their fall from favor is that there are more and more second mortgage
lenders now that will lend at a high loan to value. In addition, sellers often
prefer to accept offers from buyers who have already sold their property.
broker
Broker
has several meanings in different situations. Most Realtors are "agents"
who work under a "broker." Some agents are brokers as well, either
working form themselves or under another broker. In the mortgage industry,
broker usually refers to a company or individual that does not lend the money
for the loans themselves, but broker loans to larger lenders or investors. As a
normal definition, a broker is anyone who acts as an agent, bringing two parties
together for any type of transaction and earns a fee for doing so.
buydown
Usually
refers to a fixed rate mortgage where the interest rate is "bought down"
for a temporary period, usually one to three years. After that time and for the
remainder of the term, the borrowers payment is calculated at the note rate. In
order to buy down the initial rate for the temporary payment, a lump sum is paid
and held in an account used to supplement the borrowers monthly payment. These
funds usually come from the seller (or some other source) as a financial
incentive to induce someone to buy their property. A "lender funded buydown"
is when the lender pays the initial lump sum. They can accomplish this because
the note rate on the loan (after the buydown adjustments) will be higher than
the current market rate. One reason for doing this is because the borrower may
get to "qualify" at the start rate and can qualify for a higher loan
amount. Another reason is that a borrower may expect his earnings to go up
substantially in the near future, but wants a lower payment right now.
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call option
Similar to the acceleration clause.
cap
Adjustable
Rate Mortgages have fluctuating interest rates, but those fluctuations are
usually limited to a certain amount. Those limitations may apply to how much the
loan may adjust over a six month period, an annual period, and over the life of
the loan, and are referred to as "caps." Some ARMs, although they may
have a life cap, allow the interest rate to fluctuate freely, but require a
certain minimum payment which can change once a year. There is a limit on how
much that payment can change each year, and that limit is also referred to as a
cap.
cash-out refinance
When a borrower refinances his
mortgage at a higher amount than the current loan balance with the intention of
pulling out money for personal use, it is referred to as a "cash out
refinance."
certificate of deposit
A time deposit held
in a bank which pays a certain amount of interest to the depositor.
certificate
of deposit index
One of the indexes used for determining interest rate
changes on some adjustable rate mortgages. It is an average of what banks are
paying on certificates of deposit.
chain of title
An
analysis of the transfers of title to a piece of property over the years.
clear
title
A title that is free of liens or legal questions as to ownership
of the property.
closing
This has different meanings in
different states. In some states a real estate transaction is not consider "closed"
until the documents record at the local recorders office. In others, the "closing"
is a meeting where all of the documents are signed and money changes hands.
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closing costs
Closing costs are separated into what are called "non-recurring
closing costs" and "pre-paid items." Non-recurring closing costs
are any items which are paid just once as a result of buying the property or
obtaining a loan. "Pre-paids" are items which recur over time, such as
property taxes and homeowners insurance. A lender makes an attempt to estimate
the amount of non-recurring closing costs and prepaid items on the Good Faith
Estimate which they must issue to the borrower within three days of receiving a
home loan application.
cloud on title
Any conditions
revealed by a title search that adversely affect the title to real estate.
Usually clouds on title cannot be removed except by deed, release, or court
action.
co-borrower
An additional individual who is both
obligated on the loan and is on title to the property.
collateral
In
a home loan, the property is the collateral. The borrower risks losing the
property if the loan is not repaid according to the terms of the mortgage or
deed of trust.
collection
When a borrower falls behind, the
lender contacts them in an effort to bring the loan current. The loan goes to "collection."
As part of the collection effort, the lender must mail and record certain
documents in case they are eventually required to foreclose on the property.
commission
Most
salespeople earn commissions for the work that they do and there are many sales
professionals involved in each transaction, including Realtors, loan officers,
title representatives, attorneys, escrow representative, and representatives for
pest companies, home warranty companies, home inspection companies, insurance
agents, and more. The commissions are paid out of the charges paid by the seller
or buyer in the purchase transaction. Realtors generally earn the largest
commissions, followed by lenders, then the others.
common area
assessments
In some areas they are called Homeowners Association Fees.
They are charges paid to the Homeowners Association by the owners of the
individual units in a condominium or planned unit development (PUD) and are
generally used to maintain the property and common areas.
common
areas
Those portions of a building, land, and amenities owned (or
managed) by a planned unit development (PUD) or condominium project's
homeowners' association (or a cooperative project's cooperative corporation)
that are used by all of the unit owners, who share in the common expenses of
their operation and maintenance. Common areas include swimming pools, tennis
courts, and other recreational facilities, as well as common corridors of
buildings, parking areas, means of ingress and egress, etc.
common
law
An unwritten body of law based on general custom in England and used
to an extent in some states.
comparable sales
Recent sales
of similar properties in nearby areas and used to help determine the market
value of a property. Also referred to as "comps."
condominium
A
type of ownership in real property where all of the owners own the property,
common areas and buildings together, with the exception of the interior of the
unit to which they have title. Often mistakenly referred to as a type of
construction or development, it actually refers to the type of ownership.
condominium
conversion
Changing the ownership of an existing building (usually a
rental project) to the condominium form of ownership.
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construction
loan
A short-term, interim loan for financing the cost of construction.
The lender makes payments to the builder at periodic intervals as the work
progresses.
contingency
A condition that must be met
before a contract is legally binding. For example, home purchasers often include
a contingency that specifies that the contract is not binding until the
purchaser obtains a satisfactory home inspection report from a qualified home
inspector.
contract
An oral or written agreement to do or not to do a
certain thing.
conventional mortgage
Refers to home loans
other than government loans (VA and FHA).
convertible ARM
An adjustable-rate mortgage that allows
the borrower to change the ARM to a fixed-rate mortgage within a specific time.
cooperative
(co-op)
A type of multiple ownership in which the residents of a
multiunit housing complex own shares in the cooperative corporation that owns
the property, giving each resident the right to occupy a specific apartment or
unit.
credit
An agreement in which a borrower receives
something of value in exchange for a promise to repay the lender at a later
date.
credit history
A record of an individual's repayment
of debt. Credit histories are reviewed my mortgage lenders as one of the
underwriting criteria in determining credit risk.
creditor
A
person to whom money is owed.
credit report
A report of an
individual's credit history prepared by a credit bureau and used by a lender in
determining a loan applicant's creditworthiness.
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MORTGAGE 101
A - C
