Adjustable Rate Mortgage (ARM) A general term for any mortgage in which the interest rate, and generally the payments, change over the life of the loan. The interest rate is adjusted to match the rise or fall of a pre-selected interest rate index, and the regular monthly payments increase or decrease accordingly. Different types of ARMs have different frequencies in these adjustments. Some ARMs have limits on their payment and interest rate changes, and a maximum interest rate over the life of the loan. The initial rate of an ARM is usually low, permitting the borrower to buy real estate that would be unaffordable with a fixed rate mortgage, but risking higher payments later on. Agent One who is legally authorized by another to represent him/her or act in his/her behalf. For example, one may hire a broker to act as an agent in selling property. Amortization A plan for gradually repaying the money borrowed in periodic payments. Generally, with each payment one pays back part of the money originally borrowed (the principal) plus interest on the declining balance of the principal. The amount of the periodic payments depends, among other things, on the amount of the principal, the interest rate, and the length of time allowed for repayment. Appraisal A report made by a qualified person (the appraiser) which states his opinion of the estimated value and quality of the property. Assessed Valuation The value of property, according to an official tax assessor. The real property tax will be based on the assessed valuation. Balloon Mortgage A mortgage drawn so that the monthly payments are too small to pay off the loan within the set period. Usually, the remaining unpaid amount becomes due in a lump sum at the end of the term. Closing The final step of a sale transaction, in which the title to, or ownership of, real estate is transferred from the seller to the buyer. In closing, the buyer and the seller pay any costs that were agreed to (see "Closing Costs", below), any financial adjustments are made, and the buyer or the escrow agent is given the deed. Closing is sometimes also referred to as "settlement". Closing Costs Costs in addition to the price of the property itself that are due at closing. They normally include origination fees, discount points, attorney's fees, costs for title insurance, surveys, and recording documents, and prepayment of real estate taxes and insurance premiums held by the lender. Closing Statement A statement of the funds received and spent at the closing of a real estate sale. It is furnished by the real estate closing agent to the buyer and seller separately. The standard federal form HUD 1 is used in most residential transactions. Comparable Houses and properties that are similar in style, appearance, construction, quality and usefulness to a particular property in a certain location. Condominium Documents A set of legal papers provided to the buyer of a condominium. They usually include the condominium declaration, the plat and plans, and the by-laws of the complex. Credit Report A report from a credit reporting agency issued to a lender disclosing the credit rating of and other pertinent financial information about a prospective borrower. Deed This is the formal written document which transfers the rights of ownership and possession (i.e. the title) from the seller to the buyer. Sometimes the deed is called a title document. It contains a specific, legal description of the property. Deed of Trust In some states, including Virginia, this is used in place of a mortgage or a deed to secure debt. While there are only two people involved in a mortgage, the borrower and the lender, there are three people involved in a deed of trust - the borrower, the lender and the trustee. The borrower transfers legal title to the property to the trustee, who holds the property as a security for the debt. If the borrower pays the mortgage as agreed, the trustee transfers the legal title at the completion of payment. If the borrower does not pay the mortgage as agreed, the trustee can sell the property. Down Payment The difference between the sales price of real estate and the amount of a mortgage loan. The downpayment is usually paid in full at the closing. Earnest Money Money paid by a buyer at the time of making an offer or entering into a contract to purchase, intended to show the buyer's good faith intention to complete the purchase. Generally earnest money is applied against the purchase price, but it may be forfeited if the buyer fails to complete the purchase. Equity The owner's interest in a property, after any loans have been subtracted from its market value. When the mortgage has been paid off, the equity in the property is 100%. Escrow Account A special bank account, maintained by the lender or an escrow agent, in which money is set aside so that the lender can pay the taxes, hazard and mortgage insurance, ground rents, and other special costs on a mortgage or property as they come due. Each month a certain portion, called the escrow payment, of your monthly mortgage payment goes into this account. Examination of Title A review which reveals the previous owners of, and encumbrances on, a piece of real estate. To conduct this review, one must search the public records or examine an abstract of title. Fair Market Value An appraisal term. It is the price that the buyer is willing to pay and that the seller is willing to accept for a piece of property. In arriving at this price, the purchaser and the seller must be reasonably aware of the pertinent facts and undergo no obligation to buy or sell. First Mortgage The loan that has the primary claim on all proceeds from the sale or other disposition of the property. Fixed Rate Mortgage The basic type of loan, in which the interest rate does not change over the life of the loan. For example, if the interest on a 30 year mortgage is set at 9%, it will stay at 9% until the mortgage is paid off. General Warranty Deed A deed of conveyance in which the person conveying his interest in a property fully warrants good and clear title to the premises. It offers the greatest protection of any deed. Grantee When an interest in property is conveyed to a purchaser, the purchaser becomes the grantee. The grantee might be a person, a corporation or a partnership. Grantor When an interest in property is conveyed by a seller to another person or entity, the seller become the grantor. Ground Rent The rent at which land is let (leased) to a tenant either for a long term or perpetually. For example: a corporation can pay to have its office built on land that it rents from the owner of the land. The corporation owns the buiding but not the land. Hazard Insurance An insurance policy intended to cover an owner occupied private dwelling and its contents against common disasters such as fire, wind damage and theft. In most cases it also protects the owner against legal claims of anyone who becomes injured on the property. This is also known as a package policy. Homeowners Association An organization made up of homeowners who reside within a particular area or development, such as a subdivision or a condominium. The members of such an association enforce any restrictions on the use of property, and both provide and manage community facilities. Homeowner's Policy An insurance policy intended to cover an owner-occupied private dwelling and its contents against common disasters, such as fire, wind damage and theft. In most cases it also protects the owner against the legal claims of anyone who becomes injured on the property. Also known as a package policy. Home Warranty Policy purchased by a buyer or seller as assurance against unexpected home repair costs. HUD 1 A statement of the funds received and spent at the closing of a real estate sale. It is furnished by the real estate closing agent to the buyer and seller separately. The standard form "HUD 1" is used in most residential transactions. Inspection Formal analysis of a home's structure and systems, often performed by a licensed professional. Interest A charge for borrowing money. It is usually expressed as an annual rate, or percentage, of the money still owed. For example, the interest rate might be 9%. It is also a general term meaning partial or total right to property. An interest in real estate might be a right, such as an easement, a lease, partial ownership, or full ownership. Kick-out Clause A clause in a sales contract that permits a seller to cancel a contract and return the deposit if a contingency is not removed within a certain period of time. Lease A written agreement stating the conditions for the possession and use of real estate (and/or personal property) given by the owner to another person (the tenant) for a specific period of time and rent. Listing A written agreement that authorizes an agent to sell or lease a piece of real estate for the owner. Loan Fee In addition to points, many lenders charge fees to cover costs of services provided, such as application charges, inspection and preparation of documents. Loan-to-Value Ratio The amount borrowed to purchase property compared to the sale price or the appraised value (whichever is lower) of that property. It is expressed as a percentage. For example, if one is buying a house for $100,000, and arranges for a $90,000 loan, the LTVR is 90%. Mortgage A formal document which proves the legal claim or lien on property that the lender holds as security for the money borrowed. There are two people involved in a mortgage, the borrower and the lender. The borrower pledges the property as security for the repayment of the money borrowed, but does not transfer title to the lender. However, if the debt is not paid as agreed, the lender, through a court proceeding, can compel the sale of the property to pay off the debt. Mortgage Insurance Premium MIP FHA Loans. Insurance provided by a private company to protect the mortgage lender against default. Generally, this insurance is required by the lender when the down payment is less than 20% of the property value. The lender requires the borrower to pay the insurance premiums. With a conventional loan this is referred to as a private mortgage insurance (PMI). Multiple Listing Service (MLS) A system in which participating brokers agree to share information on the sale or lease of houses listed by any of them. Option An agreement allowing (but not requiring) the purchase or sale of property for a stated price within a specified period of time. For example, if one is given a 90 day option to buy a piece of land for $500 per acre, one may purchase it within 90 days at that price, but has no obligation to do so. Origination Fee A fee that the lender charges the borrower to cover the cost of issuing a loan. It pays for processing the loan, which includes collecting information about the borrower's credit-worthiness and about the property being purchased. This information is analyzed to determine whether the borrower will be able to repay the loan as agreed, and whether the property provides sufficient collateral in the event of failure to pay. The fee is usually computed as a percentage of a mortgage loan. It usually does not include fees for appraisals, credit reports, inspections or loan document preparation. Over-improvement An improvement to land, such as a building, that is inappropriate due to excessive size, excessive cost or inadequate financial returns. Percolation Test A test which determines how fast water seeps through soil. It is required when a septic tank is being considered for a property. PITI This stands for principal, interest, (real estate)taxes, and (fire)insurance, the four costs normally included in a monthly mortgage payment. The monthly payments for the principal and interest go to the lender to pay off the debt, while the real estate taxes and fire insurance go into the escrow or custodial account to pay these amounts when they fall due. PITI Ratio Also called an "income-to-debt" ratio. It is used by lenders in deciding whether to give the borrower a loan. It compares the amount of the applicant's monthly income to the amount owed each month in principal, interest, real estate tax and insurance on that mortgage. Point Also called a discount point. It is a one-time charge due at closing. One point is one percent of the loan. For example, if a loan is for $100,000, two points is $2,000. By paying points, one increases the initial costs in order to decrease the interest rate. Power of Attorney The authority to act in another person's behalf, at his request. If one is granted such authority, one is called the attorney-in-fact. The grantor may revoke a power of attorney at any time. If the grantor dies, relocates, or is judged legally incompetent, the power of attorney will automatically terminate. Principal At the beginning of a loan, it is the amount that is borrowed; when borrowing $100,000, the principal is $100,000. During the term of the loan, it is the balance owed exclusive of interest, late charges and other fees. The principal is always the amount on which interest is paid. With most loans, mortgage payments made in early years are applied mainly to the interest that is owed, with very little from each payment going to pay off the principal. Only later in the life of the loan will a large portion of the payments be applied to reduction of the principal. Private Mortgage Insurance (PMI) Insurance provided by a private company to protect the mortgage lender against mortgage default. Generally this insurance is required by the lender when the down payment is less than 20% of the property value. The lender requires the borrower to pay the insurance premiums. With an FHA loan this is referred to as a mortgage insurance premium (MIP). Promissory Note A document in which one promises to pay a stated amount on a specific date. The note normally states the name of the person to be paid, as well as the terms for payment and any interest rate. Pro Rate To divide expenses and income between a buyer and a seller in proportionate shares. For example, if someone purchases a property at mid-year, after the seller has already paid taxes on it for the whole year, the purchaser reimburses one half of those taxes. This, the pro-rata share, represents the purchaser's share of that year's taxes. Qualifying Income Ratio Used by lenders in deciding whether to offer a loan. One type compares only the amount of proposed monthly mortgage payment to monthly income. Another compares the amount of total monthly payments (e.g. car, credit card and proposed mortgage payments) to monthly income. Real Estate Taxes The sum of money levied on a property based on the assessed valuation on a yearly basis. Real estate taxes are generally paid in advance. Real Property A general term meaning land, buildings and other improvements on the land, and certain rights arising from its ownership. Your real property includes any land you own, the structures built on it, the crops growing from it, and the water and minerals under it. It also includes the right to enjoy the scenic view, sunlight, wind, and easements that arise from the terms of ownership or lease. Real property is commonly known as real estate. Realtor Anyone who is both a licensed real estate practitioner and an active member of the local real estate board. Local boards are affiliated with the National Association of Realtors, and realtors subscribe to its strict Code of Ethics. Recording Any legal document that affects the ownership of real property is recorded in a book of public records. For example, when property is sold, the deed is recorded by the registrar or county clerk. This gives notice of ownership to all interested parties. Recording Fee The cost of changing the public record when ownership of property is transferred from one person to another. Either the buyer or the seller will pay the transfer fees to the city or county government. RESPA Real Estate Settlement Procedures Act. A federal law that protects a home buyer by requiring the lender to provide him with estimates of and information about the closing costs before closing day. Second Mortgage A junior mortgage whose claim on proceeds from the sale or disposition of a property is subordinate to a first mortgage. A second mortgage loan can be used to reduce the cash down payment for purchase of property. Special Warranty Deed With this deed of conveyance, the grantor (seller) agrees to protect the grantee (buyer) from any claims against the title of the property while he owned it. Survey A measurement of land, performed by a registered land surveyor. The surveyor draws up a plat, or map, showing the land's location in relation to known points of reference, as well as its dimensions and features. The plat will also include the locations and dimensions of any structures on the land. Tenant One who is not the owner, but who occupies real property with the consent of the owner. The tenant is entitled to exclusive possession and enjoyment of the property for a specific period of time and for payment of rent as specified in a lease. Time Is Of The Essence A phrase often used in legal contracts. It means that the transaction, such as closing on a purchase, must be performed within the specified period of time. Title In mortgages, title can refer to two things: The right of ownership and possession of a particular property; or the document that proves those rights. One can buy the rights of ownership and possession (title), inherit them or accept them as a gift. Title Insurance Policy Protects the insured, up to a specified amount, against losses arising from claims against the property due to a defect in the title. An owner is insured up to the specified amount only when he has his own policy, naming him as beneficiary. A mortgagee's (e.g. the lender's) title insurance policy does not protect the owner. Title Search An examination of public records, laws, and court actions to make sure that the seller is the legal owner and to disclose all other claims or encumbrances on the property affecting its ownership. Zoning Local governments establish and sometimes change the types of land usage that affect any property in their area. The basic zoning categories are residential, commercial, or industrial.
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