Home Buyer's
Dictionary
ARM?
GPM? PITI? You’d have to be a cryptologist to figure
out some of the terms buyers encounter during the home
buying process. Doing research on how to buy a
house before
beginning the process can greatly improve your
experience and prepare you for the exciting course
ahead. And with this glossary of home buying terms at
your side, you can rest easy that your new home won’t
get lost in translation.
Adjustable Rate
Mortgage (ARM). A loan whose interest rate is
adjusted according to movements in the financial market.
Amortization.
A payment plan by which a borrower reduces a debt
gradually through monthly payments of principal and
interest.
Annual
Percentage Rate (APR). The annual cost off
credit over the life of a loan, including interest,
service charges, points, loan fees, mortgage insurance,
and other items.
Appraisal.
An evaluation to determine what a piece of property
would sell for in the marketplace.
Appreciation.
The increase in the value of a property.
Assessment.
A tax levied on a property or a value placed on the
worth of property by a taxing authority.
Assumption.
A transaction allowing the buyer of a home to assume
responsibility for an existing loan on the home instead
of getting a new loan.
Balloon.
A loan which has a series of monthly payments (often for
5 years or less) with the remaining balance due in a
large lump sum payment at the end.
Binder.
A receipt for a deposit paid to secure the right to
purchase a home at terms agreed upon by the buyer and
seller.
Buydown.
A subsidy (usually paid by a builder or developer) to
reduce the monthly payments on a mortgage loan.
Cap. A
limit to the amount an interest rate or a monthly
payment can increase for an adjustable rate loan either
during an adjustment period or over the life of the
loan.
Certificate of
Occupancy. A document from an official agency
stating that the property meets the requirements of
local codes, ordinances, and regulations.
Closing.
A meeting to sign documents which transfer property from
a seller to a buyer. (Also called settlement)
Closing Costs.
Charges paid at settlement for obtaining a mortgage loan
and transferring real estate title.
Conditions,
Covenants, and Restrictions (CC and Rs). The
standards that define how a property may be used and the
protections the developer has made for the benefit of
all owners in a subdivision.
Condominium.
A home in a multi-unit complex; each purchaser owns an
individual unit, and all the purchasers jointly own the
common areas, such as the surrounding land, hallways,
etc.
Conventional
Loan. A mortgage loan not insured by a
government agency (such as FHA or VA).
Convertibility.
The ability to change a loan from an adjustable rate
schedule to a fixed rate schedule.
Cooperative.
A form of ownership in a multi-unit complex; the
purchasers own shares of the entire complex rather than
owning individual units.
Credit Rating.
A report ordered by a lender from a credit bureau to
determine if the borrower is a good credit risk.
Default.
A breach of a mortgage contract (such as not making
monthly payments).
Density.
The number of homes built on a particular acre of land.
Allowable densities are usually determined by local
jurisdictions.
Downpayment.
The difference between the sales price and the mortgage
amount on a home. The downpayment is usually paid at
closing.
Due-on-Sale.
A clause in a mortgage contract requiring the borrower
to pay the entire outstanding balance upon sale or
transfer of the property. A mortgage with a due-on-sale
clause is not assumable.
Earnest Money.
A sum paid to the seller to show that a potential
purchaser is serious about buying.
Easement.
Right-of-way granted to a person or company authorizing
access to the owner’s land; for example, a utility
company may be grated an easement to install pipes or
wires. An owner may voluntarily grant an easement, or in
some cases, be compelled to grant one by a local
jurisdiction.
Equity.
The difference between the value of a home and what is
owed on it.
Escrow.
The handling of funds or documents by a third party on
behalf of the buyer and/or seller.
Federal Housing
Administration (FHA). A federal agency which
insures mortgages that have lower downpayment
requirements than conventional loans.
Fixed Rate
Mortgage. A mortgage whose interest rate
remains constant over the life of the loan. The payments
are not necessarily level. (See Graduated Payment
Mortgage and Growing Equity Mortgage).
Fixed Schedule
Mortgage. A mortgage whose payment schedule for
the life of the loan is established at closing. The
payments and interest rate are not necessarily level.
Graduated
Payment Mortgage (GPM). A fixed-rate,
fixed-schedule loan which starts with lower payments
than a level payment loan; the payments rise annually
over the first 5 to 10 years and then remain constant
for the remainder of the loan. GPMs involve negative
amortization.
Growing Equity
Mortgage (Rapid Payoff Mortgage). A fixed-rate,
fixed-schedule loan which starts with the same payments
as a level payment loan; the payments rise annually,
with the entire increase being used to reduce the
outstanding balance. No negative amortization occurs,
and the increase in payments may enable the borrower to
pay off a 30-year loan in 15 to 20 years, or less.
Hazard
Insurance. Protection against damage caused by
fire, windstorm, or other common hazards. Many lenders
require borrowers to carry it in an amount at least
equal to the mortgage.
Housing Finance
Agency. A state agency which offers a limited
amount of below-market-rate home financing for low-and
moderate-income households.
Index.
The interest rate or adjustment standard which
determines the changes in monthly payments for an
adjustable rate loan.
Infrastructure.
The public facilities and services needed to support
residential development, including highways, bridges,
schools, and sewer and water systems
Interest.
The cost paid to a lender for the use of borrowed money.
Joint Tenancy.
A form of ownership by which the tenants own a property
equally. If one dies, the other would automatically
inherit the entire property.
Level Payment
Mortgage. A mortgage whose payments are
identical for each month over the life of the loan.
Mortgage Broker.
A broker who represents numerous lenders and helps
consumers find affordable mortgages; the broker charges
a fee only if the consumer fins a loan.
Mortgage
Commitment. A formal written communication by a
lender, agreeing to make a mortgage loan on a specific
property, specifying the loan amount, length of time and
conditions.
Mortgage Company
(Mortgage Banker). A company that borrows money
from a bank, lends it to consumers who want to buy
homes, then sells the loans to investors.
Mortgagee.
The lender who makes a mortgage loan.
Mortgage Loan.
A contract in which the borrower’s property is pledged
a s collateral and which can be repaid in installments
over a long period. The mortgagor (buyer) promises to
repay principal and interest, to keep the home insured,
to pay all taxes, and to keep the property in good
condition.
Mortgage
Origination Fee. A charge by a lender for the
work involved in preparing and servicing a mortgage
application (usually 1 percent of the loan amount).
Negative
Amortization. An increase in the outstanding
balance of a loan when a monthly payment is not large
enough to cover all of the interest due.
Note. A
formal document showing the existence of a debt and
stating the terms of repayment.
PITI.
Principal, interest, taxes, and insurance (the 4 major
components of monthly housing payments).
Point.
A charge of 1 percent of the mortgage amount. Points are
a one-time charge assessed by the lender at closing to
increase the interest yield on a mortgage loan.
Prepayment.
Payment of all or part of a debt prior to its maturity.
Principal.
The amount borrowed in a loan, excluding interest and
other charges.
Property Survey.
A survey to determine the boundaries of your property.
The cost will depend on the complexity of the survey.
Rapid Payoff
Mortgage. (See Growing Equity Mortgage).
Recording Fee.
A charge for recording the transfer of a property, paid
to a city, county, or other appropriate branch of
government.
Real Estate
Settlement Procedures Act (RESPA). A federal
law requiring lenders to provide home buyers with
information about known or estimated settlement costs.
The act also regulates other aspects of settlement
procedures.
R-Value.
The resistance of insulation material (including
windows) to heat passing through it. The higher the
number, the greater the insulating value.
Sales Contract.
A contract between a buyer and seller which should
explain, in detail, exactly what the purchase includes,
what guarantees there are, when the buyer can move in,
what the closing costs are, and what recourse the
parties have if the contract is not fulfilled or if the
buyer cannot get a mortgage commitment at the
agreed-upon terms.
Settlement.
(See Closing).
Shared
Appreciation Mortgage. A loan in which partners
agree to share specified portions of the downpayment,
monthly payment, and appreciation.
Tenancy in
Common. A form of ownership in which the
tenants own separate but equal parts. To inherit the
property, a surviving tenant would either have to be
mentioned in the will or, in the absence of a will, be
eligible through state inheritance laws.
Title.
Evidence (usually in the form of a certificate or deed)
of a person’s legal right to ownership of a property.
Transfer Taxes.
Taxes levied on the transfer of property or on real
estate loans by state and/or local jurisdictions.
Veterans
Administration (VA). A federal agency which
insures mortgage loans with very liberal downpayment
requirements for honorably discharged veterans and their
surviving spouses.
Walk-Through.
A final inspection of a home before settlement to search
for problems that need to be corrected before ownership
changes hands.
Warranty.
A promise, either written or implied, that the material
and workmanship of a product is defect-free or will meet
a specified level of performance over a specified period
of time. Written warranties on new homes are either
backed by insurance companies or by the builders
themselves.
Zoning.
Regulations established by local governments regarding
the location, height, and use for any given piece of
property within a specific area.
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