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Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes over time in line with movements in
the index. ARMs are also referred to as AMLs (adjustable mortgage loans) or VRMs
(variable rate mortgages).
Adjustment Period
The length of time between interest rate changes on an ARM. For example, a loan
with an adjustment period of one year is called a one-year ARM, which means that
the interest rate can change once a year.
Amortization
Repayment of a loan in installments of principal and interest, rather than interest-only
payments.
Annual Percentage Rate (APR)
The total finance charge (interest, loan fees, points) expressed as a percentage
of the loan amount.
Appraisal
An estimate of the property's value provided by a professional appraiser.
Assumption of Mortgage
A buyer's agreement to assume the liability under an existing note that is secured
by a mortgage or deed of trust. The lender must approve the buyer in order to release
the original borrower (usually the seller) from liability.
Balloon Payment
A lump sum principal payment due at the end of some mortgages or other long-term
loans.
Binder
Sometimes known as an offer to purchase or an earnest money receipt. A binder is
the acknowledgement of a deposit along with a brief written agreement to enter into
a contract for the sale of real estate.
Buydown
Permanent - prepaid interest that brings the note rate on the loan down to a lower,
permanent rate. Temporary - prepaid interest that lowers the note rate temporarily
on the loan, allowing the buyer to more readily qualify and to increase payments
as income grows.
Cap
The limit on how much an interest rate or monthly payment can change, either at
each adjustment or over the life of the mortgage.
Cash Reserves
The amount of the buyer's liquid cash remaining after making the down payment and
paying all closing costs.
CC&Rs
Covenants, conditions and restrictions. A document that controls the use, requirements
and restrictions of a property.
Certificate of Commitment
The lender's approval of a VA loan, which is usually good for up to six months.
Certificate of Reasonable Value (CRV)
A document that establishes the maximum value and loan amount of a VA guaranteed
mortgage.
Chattel
Personal property.
Closing Statement
The financial disclosure statement that accounts for all of the funds received and
expected at the closing, including deposits for taxes, hazard insurance, and mortgage
insurance.
Commitment Period
The period during which a loan approval is valid.
Condominium
A form of real estate ownership where the owner receives title to a particular unit
and has a proportionate interest in certain common areas. The unit itself is generally
a separately owned space whose interior surface (walls, floor, ceilings) serve as
its boundaries.
Contingency
A condition that must be satisfied before a contract is binding. For instance, a
sales agreement may be contingent upon the buyer obtaining financing.
Conversion Clause
A provision in some ARMs that enables home buyers to change an ARM to a fixed rate
loan, usually after the first adjustment period. The new fixed rate is generally
set at the prevailing interest rate for fixed rate mortgages. This conversion feature
may cost extra.
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Cooperative
A form of multiple ownership in which a corporation or business trust entity holds
title to a property and grants occupancy rights to shareholders by means of proprietary
leases or similar arrangements.
CRB
Certified Residential Broker. To be certified, a broker must be a member of the
National Association of Realtors, have five years experience as a licensed broker
and have completed required Residential Division courses.
CRS
Certified Residential Specialist.
Debt Ratios
The comparison of a buyer's housing cost to his or her gross or net effective income,
and the comparison of a buyer's long-term debt to his or her gross or net effective
income. The first ratio is housing ratio; the second ratio is total debt ratio.
Due-On-Sale Clause
A clause that requires a full payment of a mortgage or deed of trust when the secured
property changes ownership.
Earnest Money
The portion of the down payment delivered to the seller or escrow agent by the purchaser
with a written offer as evidence of good faith.
Escrow
A procedure in which a third party acts as a stakeholder for both the buyer and
the seller, carrying out both parties' instructions and assuming responsibility
for handling all of the paperwork and distribution funds.
Equity
The difference between what is owed and what the property could be sold for.
FHA Loan
A loan insured by the Federal Housing Administration (of the Department of Housing
and Urban Development).
Federal Home Loan Mortgage Corporation (FHLMC)
Called "Freddie Mac"; a part of the secondary market, particularly used to purchase
loans from savings and loan lenders within the Federal Home Loan Bank Board.
Federal National Mortgage Association (FNMA)
Popularly known as "Fannie Mae"; a privately owned corporation created by Congress
to support the secondary mortgage market. It purchases and sells residential mortgages
insured by the FHA or guaranteed by the VA, as well as conventional home mortgages.
Fee Simple
An estate in which the owner has unrestricted power to dispose of the property as
he wishes, including leaving by will or inheritance. It is the greatest interest
a person can have in real estate.
Finance Charge
The total cost a borrower must pay, directly or indirectly, to obtain credit according
to Regulation Z.
Fixed Rate Mortgage
A conventional loan with a single interest rate for the life of the loan.
Fully Indexed Rate
The maximum interest rate on an ARM that can be reached at the first adjustment.
Gift Letter
A letter from a relative stating that an amount will be gifted to the buyer, and
that said amount is not to be repaid.
Government National Mortgage Association (GNMA)
Called "Ginnie Mae"; a government part of the secondary market that deals primarily
in recycling VA and FHA mortgages, particularly those that are highly leveraged.
Graduated Payment Mortgage
A residential mortgage with monthly payments that start at a low level and increase
at a predetermined rate.
GRI Graduate, Realtors Institute.
A professional designation granted to a member of the National Association of Realtors
who has successfully completed courses covering Law, Finance and Principles of Real
Estate.
Home Inspection Report
A qualified inspector's report on a property's overall condition. The report usually
includes an evaluation of both the structure and mechanical systems.
Home Warranty Plan
Protection against failure of mechanical systems within the property. Usually includes
plumbing, electrical, heating systems and installed appliances.
Index
A measure of interest rate changes used to determine changes in an ARM's interest
rate over the term of the loan.
Initial Interest Rate
The introductory interest rate on a loan; signals that there may be rate adjustments
later in the loan.
Joint Tenancy
An equal undivided ownership of a property by two or more persons. Upon the death
of any owner, the survivors take the decedent's interest in the property.
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Jumbo Loans
Mortgage loans that exceed the loan amounts acceptable for sale in the secondary
market; these jumbos must be packaged and sold differently to investors and therefore
have separate underwriting guidelines.
Lien
A legal hold or claim on property as security for a debt or charge.
Loan Commitment
A written promise to make a loan for a specified amount on specified terms.
Loan-To-Value-Ratio
The relationship between the amount of the mortgage and the appraised value of the
property, expressed as a percentage of the appraised value.
Lock-in
The fixing of an interest rate or points at a certain level, usually during the
loan application process. It is usually done for a certain period of time, such
as 60 days, and may require a fee or premium in the form of a higher interest rate.
Margin
The number of percentage points the lender adds to the index rate to calculate the
ARM interest rate at each adjustment.
Mortgage Insurance Premium (MIP)
The mortgage insurance required on FHA loans for the life of said loans; MIP can
either be paid in cash at closing or financed in its entirety in the loan. The premium
varies depending on the method of payment.
Mortgage Life Insurance
A type of term life insurance often bought by home buyers. The coverage decreases
as the mortgage balance declines. If the borrower dies while the policy is in force,
the mortgage debt is automatically covered by insurance proceeds.
Negative Amortization
Occurs when monthly payments fail to cover the interest cost. The interest that
isn't covered is added to the unpaid principal balance, which means that even after
several payments the borrowers could owe more than they did at the beginning of
the loan. Negative amortization can occur when an ARM has a payment cap that results
in monthly payments that aren't high enough to cover the interest.
Origination Fee
A fee or charge for work involved in evaluating, preparing, and submitting a proposed
mortgage loan. The fee is limited to one percent for FHA and VA loans.
Payment Cap
The maximum amount the payment can adjust in any given time frame.
PITI
Principal, Interest, Taxes and Insurance.
Planned Unit Development (PUD)
A zoning designation for property developed at the same or slightly greater overall
density than conventional development, sometimes with improvements clustered between
open, common areas. Use may be residential, commercial or industrial.
Point
An amount equal to one percent of the principal amount of the investment or note.
Lender assesses loan discount points at closing to increase the yield on the mortgage
to a position competitive with other types of investment.
Prepayment Penalty
A fee charged to a borrower who pays a loan before its due. Not allowed for FHA
or VA loans.
Private Mortgage Insurance (PMI)
Insurance written by a private company protecting the lender against loss if the
borrower defaults on the mortgage.
Purchase Agreement
A written document in which the purchaser agrees to buy certain real estate and
the seller agrees to sell under stated terms and conditions. Also called a sales
contract, earnest money contract, or agreement for sale.
Rate Gap
The difference between where the rate is now and where it could adjust to on an
ARM. Also used to compare the difference between a current conventional rate and
that of an ARM.
Realtor®
A real estate broker or associate active in a local real estate board affiliated
with the National Association of Realtors®.
Regulation Z
The set of rules governing consumer lending issued by the Federal Reserve Board
of Governors in accordance with the Consumer Protection Act.
Tenancy In Common
A type of joint ownership of property by two or more persons with no right of survivorship.
Title Insurance Policy
A policy that protects the purchaser, mortgagee or other party against losses.
VA Loans
A loan, made by a private lender, that is partially guaranteed by the Veterans Administration.
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Return to Buyer's/Seller's Tips
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