What’s What … A Glossary of Terms for the Mortgage Industry
Adjustable Rate Mortgage (ARM): interest rates on this type of mortgage are periodically adjusted up or down, depending on a specified financial index.
Amortization: repayment of a mortgage debt with equal periodic payments of both principal and interest, calculated to retire the obligation at the end
Annual Percentage Rate (APR): the actual finance charge for a loan, including points and loan fees, in addition to the stated interest rate.
Application Fee: a one-time fee charged by the mortgage company for processing your application for a loan. Sometimes called the “origination fee.”
Appraisal: an expert opinion of the value or worth of a property.
ARM: see “Adjustable Rate Mortgage.”
Broker: an individual who acts as the agent of the seller or buyer. A real estate broker must be licensed by the state.
Buy-Down-Mortgage: a mortgage with a below-market interest rate made by a lender in return for an interest rate subsidy in the form of additional discount points paid by the builder, seller, or buyer.
Buyer’s Market: economic conditions in which the supply of housing exceeds demand. Sellers may be forced to make substantial price concessions.
Cap: limit on how much the interest rate can increase in an ARM.
Closing: “closing the deal,” the meeting where the deed
to property is legally transferred from seller to buyer.
Commission: fee (usually a percentage of total transaction) paid to an agent or broker for services performed. Comparative Market Analysis: a survey of attributes and selling prices of comparable houses on the market or recently sold; used to help determine pricing strategy for a seller’s property. Condominium (condo): type of real estate ownership where the owner has title to a specific unit and shared interest in common areas.
| Contingency: a condition in a contract that must be met for the contract to be binding. Contract: binding legal agreement between two or more parties that outlines the conditions for the exchange of value.
Cooperative (co-op): real estate ownership where all shareholders own the whole property, but each has proprietary occupancy rights for specific units.
Counteroffer: when the seller or buyer responds to a bid. If you you decide to offer $100,000 for a home listed at $150,000, the seller might counter your offer and propose that you purchase the home for $140,000. The new pro-posal, and any subsequent offer, is called a counteroffer.
Credit Report: a credit report lists all of your credit accounts such as charge cards, and provides detail on payment history. Lenders use this information in determining eligibility for loans.
Down Payment: percentage of the purchase price that the buyer must contribute with their own funds.
Earnest Money: a deposit paid when the sale contract is signed before the closing. In some locations, it’s called the “Binder.”
Equity: the difference between the market value of the property and what is owed on the property.
Escrow: a fund or account held by a third-party custodian until conditions of a contract are met.
Fee Simple: the most basic type of ownership, under which the owner has the right to use and dispose of the property at will.
Fixed-Rate Mortgage: interest rates on this type of mortgage remain the same over the life of the loan term. Compare to “Adjustable Rate Mortgage.”
Foreclosure: the legal action taken to extinguish a homeowner’s right and interest in a property, so that the property can be sold in a foreclosure sale to satisfy the debt.
Graduated Payment Mortgage (GPM): monthly payments start low and increase at a predetermined rate. Compare to “ARM.”
Hazard Insurance: compensates for property damage from specified hazards such as fire and wind.
| Homeowner’s Insurance: coverage that included hazard insurance, as well as personal liability and theft.
Home Warranty: a service contract that covers appliances (with exclusions) in working condition in the home for a certain period of time, usually one year.
Interest: The cost of borrowing money, usually expressed as a percentage over time.
Lien: a security claim on property until a debt is satisfied.
Loan-to-Value-Ratio: the ratio of the loan amount compared to the value of the property. Referred to as “LTV.” Market Value: the price that is established by present economic conditions, location, and general trends.
Market Price: the actual price at which a property sells.
Mortgage: security claim by a lender against property until the debt is paid.
Multiple Listing Service (MLS): a system that provides to its members detailed information about properties for sale. PITI: principal, interest, taxes, and insurance, forming the basis for monthly mortgage payments.
Point: one percent of the loan principal paid up front to reduce the interest rate on loan.
Prepayment Penalty: a fee paid by the borrower who pays off the loan before it’s due.
Prequalification: informal estimate of how much financing a potential borrower might expect to obtain. Completed before the borrower pays substantial loan application fees.
Principal: the amount of money borrowed, for which interest is charged.
Mortgage Insurance (MI): special insurance that protects the lender in case of borrower default. It’s typically required when the borrower makes less than a 20% down payment.
Realtor: a member of the National Association of Realtors.
Title: document that indicates ownership of a specific property
Title Insurance: protects against loss from legal defects in title.
Title Search: detailed examination of the entire document history of a property title to make sure there are no legal encumbrances.
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