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 equal installments
of principal and interest, rather than interest-only payments.
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 request. A binder is the acknowledgement of a deposit along
with a brief written agreement to enter into a contract for the sale of real
Cap: The limit on how much an interest rate or
monthly payment can change, either at each adjustment or over the life of the
CC&R's: Covenants, Conditions and Restrictions.
A document that controls the use, requirements and restrictions of a property.
Certificate of Reasonable Value (Covenants): A
document that establishes the maximum value and loan amount for a VA guaranteed
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.
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 surfaces (wall, floors and 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 you 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.
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.
CRS: Certified Residential Specialist.
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 five required Residential
Due-On-Sale Clause: An acceleration clause that
requires full payment of a mortgage or deed of trust when the secured property
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 of funds.
FHA Loan: A loan insured by the Insuring Office
of the Department of Housing and Urban Development; the Federal Housing Administration.
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 FHA or guaranteed by the VA, as well as conventional home
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 2.
Graduated Payment Mortgage:
A residential mortgage with monthly payments that starts at a low level and
increases 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 three 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 an evaluation of
both the structure and mechanical systems.
Index: A measure of interest rate changes used
to determine changes in an ARM's interest rate over the term of the loan.
Joint Tenancy: An equal undivided ownership of
property by two or more persons. Upon the death of any owner, the survivors
take the decedent's interest in the property.
Lien: A legal hold or claim
on property as security for a specified amount on specified terms.
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.
Margin: The number of percentage points the lender
adds to the index rate to calculate the ARM interest rate at each adjustment.
Mortgage Life Insurance: A type of term life insurance
often bought by mortgagors. The coverage decreases as the mortgage balance declines.
IF the borrower dies while the policy is in force, the debt is automatically
covered by insurance proceeds.
Negative Amortization: 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 you could owe more than you 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 1 percent for FHA and VA loans.
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. Uses may be residential, commercial or industrial.
Point: An amount equal to 1 percent of the principal
amount of the investment or note. The lender assesses loan discount points at
closing to increase the yield on the mortgage to a position competitive with
other types of investments.
Prepayment Penalty: A fee charged to a mortgagor
who pays a loan before it is 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.
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 Loan: A loan that partially guaranteed by the
Veterans Administration and made by a private lender.