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Glossary

Common Real Estate Terms

Adjustable rate mortgage (ARM) – A type of mortgage loan which has an interest rate tied to an economic index, which fluctuates with the market. Common ARM periods are one, three, five, and seven years.

Amortization – The preparation of a payment plan for a loan that allows for equal payments to be made to the creditor at consistent intervals over the life of the loan (the amortization period). Each payment covers interest accrued over the interval period, with the remainder of the payment being applied to reduce the principal owed. If every payment is made timely and in full over the amortization period, the loan will be completely repaid at the end of the amortization period.

Amortized loan – A loan that is repaid in equal installments during its term.

Annual percentage rate (APR) – The total costs (interest rate, closing costs, fees, etc.) that are part of a borrower’s loan, expressed as a percentage rate of interest. The total costs are amortized over the term of the loan.

Appraisal – A carefully documented opinion of value at a specific point in time, most commonly derived using recent sales of comparable properties by a licensed, professional appraiser.

Appreciation  – The increase over time in the value of a property caused by many factors, such as market conditions, inflation, changes to the area around the property, etc.

Assumable mortgage – A mortgage that can be taken over (“assumed”) by the buyer when a home is sold.  If interest rates have risen, an assumable mortgage at a low rate could appeal to prospective buyers.

Back-up offer – An offer that is accepted contingent upon the fall-through or voiding of a previously accepted first offer on a property.

Balloon mortgage – A type of mortgage that is generally paid over a short period of time, but is amortized over a longer period of time. Usually, the borrower pays a combination of principal and interest, and the entire unpaid balance is due at the expiration of the loan term.

Bill of sale – A physical receipt indicating the sale of personal property.

Cloud on title – Any unresolved claim against ownership of all or part of a property, affecting the owner’s title to the property and marketability of that title.

Comparative market analysisA study done by real estate sales agents and brokers using active, pending, and sold comparable properties to estimate a listing price for a property.

Consideration – The value, asset, service, information etc. offered to another party in a contract in exchange for that party’s agreeing to enter the contract.

Contingency A provision in a contract requiring certain acts to be completed before the contract is binding.

Conventional mortgage – A type of mortgage with certain limitations placed on it to meet secondary market guidelines.  Mortgage companies, banks, and savings and loans underwrite conventional mortgages.  A conventional mortgage is not backed or insured by a government agency such as the Federal Housing Administration (FHA) or Veterans Administration (VA).

Deed – A document that conveys title to real property.

Discount point – A loan fee charged by the lender to the borrower for originating the mortgage as prepaid interest. One point equals one percent of the loan amount.  Also known as “loan discount points”.

Earnest money deposit – The money given to the seller at the time the offer is made as a sign of the buyer’s good faith.

Easement – The right of a non-owner of property to use a portion or all of the property. For example, power companies often own an easement over residential properties for access to their power lines.

Encumbrance – A claim against, limitation on or liability against real estate.  Encumbrances include liens, deed restrictions, easements, encroachments and licenses.

Equity – The difference between the fair market value of a property and the amount an owner owes on any mortgages or loans secured by the property.

Escrow payment – The payment of funds held in trust by the lender for the purpose of future payments required under the contract, such as property taxes, hazard insurance, etc.

Fannie Mae – A private, shareholder-owned company created by Congress that works to make sure mortgage money is available for people to purchase homes.

Federal Housing Administration (FHA) – Division of the Department of Housing and Urban Development, which sets standards for the underwriting of private mortgages and also insures residential mortgages made by private lenders.

FHA insured mortgage – A mortgage under which the Federal Housing Administration insures loans made according to its regulations.

Fixed rate mortgage (FRM) – A loan which charges an interest rate that does not change over the term of the mortgage.

Foreclosure – A legal action that terminates all ownership rights in a home resulting from failure to make the mortgage payments or other default under the terms of the mortgage.

Freddie Mac (FHLMC) – Federal Home Loan Mortgage Corporation is a U.S. agency which purchases first mortgages on residences.

Good faith estimate – A statement showing the ballpark costs a lender will charge.  Under the Real Estate Settlement Procedures Act, within three days of an application submission, lenders are required to provide in writing to potential borrowers a good faith estimate of closing costs.

Graduated payment mortgage (GPM) – A loan in which the periodic payments increase at a stated rate over a stated period of time before leveling off for the remainder of the term of the loan.

Lease purchase agreement – Agreement wherein the buyer makes a deposit to the seller toward the future purchase of a property, with the right to lease the property in the interim.

Lease with option to purchase – A rental contract which allows the tenant to purchase the property during the period of the lease. Payments under the lease may be credited, in whole or in part, against the purchase price.

Lien – A claim or charge on property for payment of some debt. With respect to a mortgage, it is the right of the lender to take the title to a certain property if the mortgage payments due on that property are not made.

Loan to value ratio (LTV) – The comparison of the amount owed on a mortgaged property to its fair market value.

Mortgage – A financial arrangement wherein an individual borrows money to purchase real property and secures the loan with the property as collateral.

Mortgage insurance premium (MIP) – Insurance to protect the investor against loss if the homeowner defaults on the mortgage.  FHA-insured loans require a small amount of cash to close a loan, thus requiring MIP. While there are ways to avoid PMI with conventional loans, there is no way to avoid MIP on FHA loans because the minimum down payment is only 3.5%.

Note – A legal document that obligates a borrower to repay a certain amount of money at a stated interest rate during a specified period of time.

Origination fee – An origination fee is an up-front fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place, and are quoted as a percentage of the total loan.

Principal, interest, taxes, and insurance (PITI) The four parts that make up a borrower’s monthly mortgage payment.

Private mortgage insurance (PMI)A special insurance paid by a borrower in monthly installments, typically related to loans of more than 80 percent of the value of the property.

Secondary Mortgage Market – Where home loans and servicing rights are bought and sold between lenders and investors. Most home loans in the U.S. are eventually sold to the secondary mortgage market. When a consumer obtains a home loan, that loan is underwritten, funded and serviced by a bank or lending institution.

Settlement statement (HUD-1) – Form used by a settlement or closing agent itemizing all charges imposed on a borrower and seller in a real estate transaction. This form gives a picture of the closing transaction and provides each party with a complete list of incoming and outgoing funds.

Title insurance – A type of insurance which guarantees to indemnify an owner or mortgagee of property for damages suffered as a result of undiscovered title defects which may arise later.

VA Loan –  A loan guaranteed by the U.S. Department of Veterans Affairs made by private lenders (such as banks or mortgage companies) to eligible veterans.

July 13, 2017