Real Estate
Glossary of Terms

ADJUSTABLE-RATE MORTGAGE (ARM)
a mortgage with an interest rate that changes periodically, according to an index that is selected when the mortgage is issued. The initial interest rate is lower than that for fixed-rate mortgages, but monthly payments can go up or down when the rate is adjusted.

ADJUSTMENT INTERVAL
the period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are one year, three and five years.

ANNUAL PERCENTAGE RATE (APR)
a stated interest rate that reflects all the financing costs of a mortgage. The APR includes points, origination fees and other finance charges in addition to the interest on the mortgage, and includes them all in a yearly interest rate. As a result, the APR is usually higher than the interest rate alone. It also provides a benchmark for comparing different types of mortgages based on the annual cost for each loan.

APPRAISAL
an estimate of the value of a property, made by a qualified professional called an appraiser.


BALLOON (PAYMENT) MORTGAGE
usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

BIWEEKLY MORTGAGE
a type of fixed-rate mortgage with payments for half the usual monthly amount scheduled every two weeks. Because you make the equivalent of 13 months of payments every year, the loan term is shortened from 30 years to 18 or 19 years, and total interest cost are substantially lower.

CAPS
consumer safeguards for adjustable-rate mortgages that limit the amount monthly payments can increase. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.

CLOSING
the meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands. Also called settlement.

CLOSING COSTS
the costs and fees associated with the official change in ownership of the property and with obtaining your mortgage that are assessed at the closing or settlement. Closing costs include required certifications, insurance, taxes and other fees, and typically total between 3 and 6 percent of the mortgage amount.

CREDIT REPORT
a report that documents a borrower's credit history and current status. Borrowers can examine their own credit reports, although most credit reporting companies charge a fee to provide a report.

DEBT-TO-INCOME RATIO
the ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans).

DOWN PAYMENT
an amount paid in cash to the seller when a home is purchased. The down payment is the difference between the purchase price and the mortgage amount, and is traditionally 10 to 20 percent of the purchase price, although many loans are now available with smaller down payments.

EQUITY
the difference between the fair market value and current indebtedness, also referred to as the owner's interest.

ESCROW
a special account set up by the lender in which money is held to pay for taxes and insurance. "Escrow" can also refer to a third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.

FHA (FEDERAL HOUSING ADMINISTRATION) MORTGAGE
a loan insured by the Federal Housing Administration. FHA mortgages require lower down payments than conventional mortgages, and also feature less stringent income and financial requirements.

FIXED-RATE MORTGAGE
a mortgage with an interest rate that remains constant for the life of the loan. The most common fixed-rate mortgage is repaid over a period of 30 years; 15 year fixed-rate mortgages are also available.

INDEX
an economic indicator, usually a published interest rate, that determines changes in the interest rate of an ARM. ARM rates are adjusted to reflect changes in the index. The margin is the amount a lender adds to the index to establish the actual interest rate on an ARM.

INTEREST
the sum paid for borrowing money, which pays the lender's costs of doing business.

LENDER BUY-DOWN MORTGAGE
a convertible mortgage offering a discounted interest rate at the beginning of the loan that gradually increases to an agreed-upon fixed-rate over the first few years of the loan. It provides lower initial payments and a stable final monthly rate, but the final rate may be somewhat higher than on a standard fixed-rate mortgage.

LOAN ORIGINATION FEE
the fee charged by a lender to prepare all the documents associated with your mortgage.

LOAN-TO-VALUE RATIO
the relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

MORTGAGE INSURANCE
an insurance policy the borrower buys to protect the lender from non-payment of the loan. Private mortgage insurance policies are usually required if you make a down payment that is below 20% of the appraised value of the home.

PITI (PRINCIPAL, INTEREST, TAXES AND INSURANCE)
the four components that (for most homeowners) are included in the monthly mortgage payment. Principal and interest are the portions of the payment assigned to repay the mortgage itself; taxes and insurance are paid by your lender into a special escrow account to pay for homeowners insurance and property taxes.

POINTS (LOAN DISCOUNT POINTS)
prepaid interest on a mortgage that is usually paid at the time of closing. Each point is equal to one percent of the total amount of a mortgage (one point on an $80,000 mortgage is $800, or 1 percent of 80,000). Most lenders offer mortgages with several combinations of points and interest rates; generally, the lower the interest rate, the more points you will pay at settlement.

PRINCIPAL
the amount of debt, not including interest, left on a loan; also the face amount of the mortgage.

TITLE INSURANCE
an insurance policy which insures you against errors in the title search, essentially guaranteeing you and your lender's financial interest in the property.

UNDERWRITING
the process of deciding whether to make a loan based on credit, employment, assets and other factors.

VA (DEPARTMENT OF VETERANS AFFAIRS) MORTGAGE
government insured loans guaranteed by the Department of Veterans Affairs, requiring very low or no down payments and with generous requirements for qualification. They are available only to veterans of the armed services, those currently on active duty or in the reserves, and their spouses.

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