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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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