Real Estate Mortgage - Glossary
acceleration clause:
A mortgage contract provision that gives the lender the right to demand payment of the entire outstanding balance if you miss a monthly payment, sell the property, or otherwise fail to perform as promised under the terms of your mortgage. (See also due-on-sale clause.)
adjustable-rate mortgage (ARM):
A mortgage whose interest rate and monthly payments vary throughout its life.
ARMs typically start with an unusually low interest rate (see teaser rate) that gradually rises over time.
If the overall level of interest rates drops, as measured by a variety of different indexes (see index), the interest rate of an ARM generally follows suit.
Similarly, if interest rates rise, so does a mortgage’s interest rate and monthly payment.
The amount that the interest can fluctuate is limited by caps (see periodic cap and life cap).
Before you agree to an adjustable-rate mortgage, be sure that you can afford the highest payments that would result if the interest rate on your mortgage increased to the maximum allowed.
adjustment period or adjustment frequency:
How often the interest rate for an adjustable-rate mortgage changes.
Some adjustable-rate mortgages change every month, but one or two adjustments per year is more typical.
The less frequently your loan rate shifts, the less financial uncertainty you may have.
But if you opt for less frequent adjustments in your mortgage rate, you’ll probably have a higher teaser rate or initial interest rate.
(The initial interest rate is also called the “start rate.”)
amortization:
Lender jargon for the process of gradually paying down a debt, usually by making monthly payments throughout the loan’s term. In the early years of a mortgage, most of the monthly payment goes toward payment of interest and little toward reducing the loan balance.
annual percentage rate (APR):
A figure that states the total yearly cost of a mortgage as expressed by the actual rate of interest paid.
The APR includes the base interest rate, points, and any other add-on loan fees and costs.
As a result, the APR is invariably higher than the rate of interest that the lender
quotes for the mortgage but gives a more accurate picture of the likely cost
of the loan. Keep in mind, however, that most mortgages aren’t held for their
full 15- or 30-year terms, so the effective annual percentage rate is higher
than the quoted APR because the points and loan fees are spread out over fewer years.
annuity:
A monthly cash advance for life from an insurance company.
appraisal:
A professional opinion about the market value of the house you
want to buy (or already own if you’re refinancing your loan).
You must pay for the mortgage lender to hire an appraiser, because this opinion helps protect
the lender from lending you money on a home that’s not worth enough
(in the event that you default on the loan and the lender must foreclose on the property).
For typical homes, the appraisal fee is several hundred dollars.
appreciation:
The increase of a property’s value.
ARM indexes:
See certificates of deposit, treasury bills, the 11th District Cost of Funds Index (COFI), and The London Interbank Offered Rate Index (LIBOR).
assessed value:
The value of a property (according to the local county tax assessor) for the purpose of determining property taxes.
assumable mortgage:
Allows future buyers of a home to take over the remaining loan balance of a mortgage.
If you need to sell your house but interest rates are high, having an assumable mortgage may be handy.
You may be able to offer the buyer your assumable loan at a lower interest rate
than the current going interest rate. Assumable, fixed-rate mortgages are virtually
extinct these days because lenders realize that they lose a great deal
of money on these types of mortgages when interest rates skyrocket.
Some adjustable-rate mortgages are assumable.
balloon loans:
Loans that require level payments, just as a 15- or 30-year,
fixed-rate mortgage does, but well before their maturity date (typically three to
ten years after the start date), the full remaining balance of the loan becomes
due and payable. Although balloon loans can save you money because they
charge a lower rate of interest relative to fixed-rate loans, balloon loans are dangerous.
Being able to refinance a loan is never a sure thing. Thus, we’re not fans of balloon loans.
bridge loan:
A loan that enables you to borrow against the equity that is tied
up in your old home until it sells. These loans can help if you find yourself in
the generally inadvisable situation of having to close on a new home before
you have sold your old one. Bridge loans are expensive compared to other
alternatives, such as using a cash reserve, borrowing from family, or using the
proceeds from the sale of your current home. In most cases, you need the
bridge loan for only a few months in order to tide you over until you sell your
house. Thus, the loan fees can represent a high cost (about 10 percent of the
loan amount) for such a short-term loan.
cap:
One of two different types of limits for adjustable-rate mortgages. The life
cap limits the highest or lowest interest rate that is allowed over the entire life
of a mortgage. The periodic cap limits the amount that an interest rate can
change in one adjustment period. A one-year ARM, for example, may have a
start rate of 5 percent with a plus or minus 2-percent periodic adjustment cap
and a 6-percent life cap. On a worst-case basis, the loan’s interest rate would
be 7 percent in the second year, 9 percent in the third year, and 11 percent
(5-percent start rate plus the 6-percent life cap) forevermore, starting with the fourth year.
cash reserve:
A sufficient amount of cash left over after closing on a mortgage
loan to make the first two mortgage payments or to cover a financial
emergency. This amount is required by most mortgage lenders. If you’re a
seller who’s thinking of extending credit to buyers, you’d also be wise to
insist that they have adequate cash reserves.
certificates of deposit (CDs):
An interest-bearing bank investment that locks an investor in for a specific period of time. Adjustable-rate mortgages are sometimes tied (indexed) to the average interest rate banks are paying on
certificates of deposit (CDs). CDs tend to move rapidly with overall changes
in interest rates. However, CD rates tend to move up a bit more slowly when
rates rise, because profit-minded bankers take their sweet time to pay more interest to depositors.
Conversely, CD rates tend to come down quickly when rates decline so that bankers can maintain their profits.
closing costs:
Costs that generally total from 2 to 5 percent of a home’s purchase
price and are completely independent of (and in addition to) the down
payment. Closing costs include such expenses as points (also called the loan
origination fee), an appraisal fee, a credit report fee, mortgage interest for the
period between the closing date and the first loan payment, homeowners
insurance premium, title insurance, prorated property tax, and recording and
transferring charges. When you’re finally ready to buy your dream home,
don’t forget that you must have enough cash to pay all these costs in order to complete the purchase.
condominiums:
Housing units contained within a larger development area in which residents own their actual units and a share of everything else in the development (lobby, parking areas, land, and the like, which are known as common areas).
conforming loans:
Mortgages that fall within Fannie Mae and Freddie Mac’s loan limits.
If you borrow less than this amount, you’ll get a lower interest rate than on so-called nonconforming or jumbo loans.
contingencies:
Conditions contained in almost all home-purchase offers.
Sellers or buyers must meet or waive all their respective contingencies before
the deal can be closed. These conditions are related to such factors as the
buyer’s review and approval of property inspections or the buyer’s ability to
obtain the mortgage financing specified in the contract. If you’re a homebuyer,
make absolutely certain that your offer contains a loan contingency.
convertible adjustable-rate mortgages:
Loans that (unlike conventional adjustable-rate mortgages) give you the opportunity to convert to a fixed-rate
mortgage, usually between the 13th and 60th month of the loan. For this privilege,
convertible adjustable-rate mortgage loans have a higher rate of interest
than conventional adjustable-rate mortgages, and a conversion fee (which
can range from a few hundred dollars to 1 percent or so of the remaining
loan balance) is charged. Additionally, if you choose to convert your ARM to
a fixed-rate mortgage, you’ll probably pay a slightly higher rate than you can
get by shopping around for the best rates available at the time you convert.
cooperatives (co-ops):
Apartment buildings where residents own a share of a corporation whose main asset is the building they live in. Cooperative apartments are generally harder to finance and harder to sell than condominiums.
cosigner:
A friend or relative who comes to a borrower’s rescue by cosigning
(which literally means being indebted for) a mortgage. If you have a checkered
past in the credit world, you may need help securing a mortgage, even
though you’re currently financially stable. A cosigner can’t improve your
credit report but can improve your chances of getting a mortgage. Cosigners
should be aware, however, that cosigning for your loan will adversely affect
their future creditworthiness, because your loan becomes what is known as a
contingent liability against their borrowing power.
credit line:
A credit account that permits a reverse mortgage borrower to control
the timing and amount of the loan advances (also known as a “line of credit”).
credit report:
A report that documents your history of repaying debt. It’s the
main report lenders utilize to determine your creditworthiness. You must
pay for this report, which is used to determine your ability to handle all
forms of credit and to pay off loans in a timely fashion. If you’re a seller who’s
providing financing for buyers, get their permission to obtain a credit report on them.
debt-to-income ratio:
Measures your future monthly housing expenses, which include your proposed mortgage payment (debt), property tax, and insurance in relation to your monthly income.
Mortgage lenders generally figure that you shouldn’t spend more than about 40 percent of your monthly income on housing costs.
deed:
The document that conveys title to real property. Before you receive
the deed to your new home, the escrow holder must receive the payoff for the
old loan on the property, your new mortgage financing, and your payments
for the down payment and closing costs. The title insurance company must
also show that the seller holds clear and legal title to the property for which title is being conveyed.
deed in lieu of foreclosure:
Instead of foreclosure, which is generally costly and time consuming for all parties,
a deed in lieu of foreclosure is a voluntarily entered agreement whereby the borrower conveys ownership of the
property in default to the lender to satisfy outstanding debt on that property.
deed of trust:
A security instrument that transfers title to property to a third person (the trustee)
as a guarantee you’ll repay a debt.
Like a mortgage, a deed of trust makes real property security for money you borrow.
default:
Status that is most often caused by failure to make monthly mortgage
payments on time. You’re officially in default when you’ve missed two
or more monthly payments. Default also refers to other violations of mortgage
terms such as trying to pass your loan on to another buyer when the
property is sold, which triggers the loan’s due-on-sale clause.
Default can lead to foreclosure on your house.
delinquency:
Status that occurs when the mortgage lender doesn’t receive a monthly mortgage payment by the due date. At first a borrower is delinquent; then he or she is in default.
depreciation:
Decrease in a property’s value (the reverse of appreciation).
down payment:
The part of the purchase price that the buyer pays in cash,
up front, and does not finance with a mortgage. Generally, the larger the
down payment, the better the deal that you can get on a mortgage.
You can usually qualify for the best available mortgage programs with a down payment
of 20 percent of the property’s value.
due-on-sale clause:
A mortgage clause that entitles the lender to demand full payment of all money due
on a loan when the borrower sells or transfers title to the property.
earthquake insurance:
Either an earthquake insurance rider on a homeowners
policy or a separate policy that pays to repair or rebuild a home if
it’s damaged in an earthquake. Some lenders insist that borrowers obtain
earthquake insurance. Even if your mortgage lender doesn’t, we strongly recommend
that you get earthquake insurance if you live in an area with earthquake
risk.
11th District Cost of Funds Index (COFI):
An adjustable-rate mortgage (ARM) index that tracks the weighted average cost of savings, borrowings, and
advances for Federal Home Loan Bank Board member banks located in
California, Arizona, and Nevada (the 11th District). Because the COFI is a
moving average of interest rates that bankers have paid depositors over
recent months, it tends to be a relatively stable, slower m
