Mortgage Dictionary Terms and Definitions
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Abstract of Judgment - Legal document indicating the amount of money the losing party in a lawsuit has been ordered to repay. If properly filed with the County Recorder's Office in the geographical area in which the said property is situated, the document serves to place a lien against the property in question.
Accelerated depreciation - Accounting practice by which a property owner can legally subtract a sizable portion of a property, whose value has dramatically depreciated within a short time period after it having been purchased.
Acquisition indebtedness - Loan taken out by a property owner in an effort to build, buy, or significantly improve a home. In most instances, the money borrowed for these purposes is considered to be a tax-free loan.
Adjustment period - Pertaining to Adjustable Rate Mortgages (ARM,) the term refers to the leveled- off, interim periods that occur in-between fluctuations in the rise and fall of interest rates.
Agreed Boundary - Reference to land use parameters established in an effort to resolve a disagreement among bordering owners of property.
Back title letter - Official document describing the sale terms and ownership pertaining to a specified property. Produced by a title insurance company, this becomes the property of either a buyer or seller's attorney upon the sale of the said property.
Balloon mortgage - Type of mortgage home loan structured whereby the borrower makes consistently, regular payments up until the end of the term when a sizably, large final payment (balloon payment) comes due in conjunction with the loan's maturity date.
Balloon payment - Within the mortgage loan arena, this term is used to identify a payment made that is significantly larger in size than any of the previous payments. Typically, this is a lump sum payment used to pay off any remaining balance that exists.
Bilateral contract - An agreement of sale under which the two promises are made: the buyer will provide currency and 2) the seller will transfer the deed to a said property.
Blanket mortgage - More commonly associated with commercial real estate dealings, this type of loan is generally secured to covered multiple structures.
Biweekly mortgage - Type of loan whereby borrowers are required to make payments twice a month, as opposed to once a month. Though each of the 26 payments is equal to half of the traditional monthly charge, the borrower still ends up paying a substantially lower amount overall on account of a reduction in accrued interest fees.
Capital gains - The amount gained by an owner in the sale of property or other valuable assets.
Capitalization - A useful technique by which one reviews the rate of return and the property's annual income(net as opposed to gross) in an effort to approximate the perceived market value of a particular commercial or rental structure.
Certificate of title - Drafted by either a lawyer or a title company, legal document affirming that the present owner of a said property is indeed the person who has the authoritative right to ownership over that asset.
Closing costs - Various obligatory charges, such as lending, title, government recording, and escrow fees, assumed by purchasers and sellers in the process of buying and | or selling property.
Collateral - Property used to financially back a debt. Should the borrower not meet his | her financial obligations make necessary payment, the lender has the authority and power to sell the property in an effort to recoup moneys owed.
Compound Interest - Interest determined by first establishing the rate of interest for the current period, adding that figure to the original principal, and then calculating the interest for the next period by using this new adjusted amount in place of the original principal.
Contiguous lots - Parcels of land that are adjacent to one another.
Contingent fee - Payment made only if a certain event happens.
Contractual lien - As an outgrowth of a voluntary agreement, a temporary, legally-binding penalty placed against a property. Often a mortgage is cited as the cause of a contractual lien.
Conventional mortgage - Terms usually used to indicate a fixed-rate, 30-year mortgage not associated with the Veteran's Administration, Federal Housing Authority, or Farmers Home Administration (FmHA).
Convertible ARM - An adjustable rate mortgage (ARM) which can be transformed into a fixed-rate mortgage, given that certain conditions are met.
Credit repository - Former, out-of-date, term used in reference to a credit reporting agency.
Debt-to-income ratio - Upon calculation, this figure is often used to determine one's credit worthiness. To determine, one needs to assess the percentage of his | her gross income used to cover outstanding loan | credit payments in contrast with the amount of his | her net income.
Generally speaking, the two essential ratios that are considered are: first, the front-end ratio, the percentage of monthly before-tax income used to make house payments (principal amount, approximated interest charges, property taxes and homeowners' insurance), and second, the back-end ration, the amount spent on other forms of money borrowed, i.e., auto | student loans and credit card bills. The first ratio is called the "front-end ratio" and the second is the "back-end ratio."
Default - Status yielded when a borrower or renter neglects to meet his | her duties as outlined within the lease or mortgage documents. Most common contributors include: failure to make regular, consistent payments and misrepresentation of one's financial worth | background.
Demand Deposit - Within the financial industry, this term is applied to moneys that can be immediately withdrawn sans prior notice. The checking account is often cited as a prime example of demand deposit.
Delinquent Mortgage - Failure by the individual who has borrowed money on a home loan to make regular, consistent payments.
Distressed Property - Property which either is in a dilapidated physical condition or is owned by an individual who is undergoing a period of economical instability.
Eminent Domain - The government's authoritative right to seize privately owned property and turn it into a public use area. However, as part of this action, the government must offer 'just compensation,'property's market value, to the owner.
Encumbrance - Any financial penalty pending against the value of a property. Specific varieties include: liability, lien and | or charge.
End loan - Term used to define the last mortgage on a property, as opposed to either a temporary loan for refurbishment or a midpoint loan.
Equity - The portion of the value of the home owned outright by the owner. Hence, this is the dollar figure, calculated by subtracting any outstanding moneys owed (mortgage balance due) from the present market rate of the home, the homeowner has paid for up until a specified date. So long as mortgage payments continue to be met and the value of the home is maintained, equity, over time, generally grows.
Escrow - Account, held by a third party, in which all pertinent materials, currency and paperwork are held until the sale is officially confirmed. After the sale goes through, the funds remains in place as a place in which to deposit additional funds to cover regular mortgage payments, property taxes, homeowners' insurance and incidentals.
Examination of title - A search of public records and title documents to uncover the name of the person who previously owned a particular property.
Exclusive listing - Official contract entitling a single real estate agent, sole rights to sell a particular property within a pre-set period. The single exception to this contract is the instance in which the property owner opts to show | sell the property on his | her own, without obligation to remit any percentage of the sale to the agent.
Experian - Among the leading trio of US credit bureaus, Experian shares this prominence with Equifax and Trans Union.
Fair Credit Reporting Act - National doctrine by which credit reports must adhere, it outlines the basic guidelines by which credit bureaus can report information in a consumer's file. Specifically, it stipulations as the type and the duration of time for which they may relay information within the confines of an authorized credit report check.
Law explaining what information credit bureaus can report and for what length of time they can report this information. This law describes how consumers can have errors in their credit reports corrected and requires that the bureaus provide copies of credit reports to consumers.
Federal Funds Rate - Cost of lending employed by depository institutions, i.e., banks when they are loaning out money to one another. Most commonly this practice occurs in conjunction with overnight lending. Federally mandated to keep a certain percentage of clients' money on hand, financial lending institutions, though they draw no interest on this prudent reserve, try and stay as close to this prescribed amount as possible.
Federal Home Loan Mortgage Corporation -(FHLMC or formerly known as Freddie Mac) FHLMC, an organization sponsored by the US government, purchases home mortgages from savings and loan associations, groups the mortgages with other loans, and persuades investors to purchase the debt.
FHA loan - A home mortgage supervised by the Federal Housing Administration. This sort of loan is given by a lender approved by the Federal Housing Administration. In most instances, the down payment associated with an FHA loan is lower than that of traditional loans. The loan is not actually given by the Federal Housing Administration; rather, the administration works in tandem with lenders to insure the mortgages promised.
Fiduciary duty - A professional responsibility to act truthfully and with good faith in representing a client. In their lines of work, title agents, bankers, and real estate agents all assume this responsibility.
First lien - The initial claim made by a lender to satisfy an unpaid debt. One example is a first mortgage.
Fixed installment - Regular, generally monthly, payments made towards paying off a loan. The mark of distinction is that these payments never waiver, rather they are set a fixed-rate in terms of payment amounts.
Fixed-rate mortgage - A residential loan with a set rate of interest. The rate of interest remains constant throughout the duration of the loan.
Forbearance - A postponement of foreclosure commonly occurs because the borrower has made arrangements to pay the overdue amount.
Foreclosure - Legal procedure during which property is sold to pay off the mortgage of a defaulting borrower. As a result, the borrower is deprived of any earning any interest on the property or other funds associated with ownership of the home, when sold at public auction.
Freddie Mac - Used to be called the Federal Home Loan Mortgage Corporation. Freddie Mac purchases home mortgages from savings and loan associations, groups the mortgages with other loans, and persuades investors to purchase the debt. The US government sponsors Freddie Mac.
Full market value (also commonly called full cash value of a home) - When discussing property taxes, this term refers to the current market taxation rate that applies to 100 percent of a home's value.
Fully amortized adjustable-rate mortgage - Type of home loan that carries with it a changeable rate of interest that must be fully paid off by the policyholder at the end of the term.
Government National Mortgage Association (also called Ginnie Mae) - Federal program that guarantees timely payment of mortgage backed-securities by either the Federal Government or such guaranteed loans as Federal Housing Authority (FHA) loans. Mortgage backed securities are grouped together mortgages used as collateral for the issuance of secondary market securities. Ginnie Mae issues no loans itself. Ginnie Mae operates within the federal Department of Housing and Urban Development (HUD).
Graduated-payment mortgage (GPM) - Type of residential home loan whereby payments begin low and, gradually over time, increase until, eventually, they reach a plateau and level out to a fixed payment rate.
Growing-equity mortgage (GEM) - Type of home loan whereby, even though a fixed rate of interest is locked-in, payments still, gradually, increase as time goes by. The advantage of this type of loan is that it allows for funds borrowed to be paid back in a shorter period of time, the average being 15 years.
Guaranteed mortgage - A loan guaranteed by a federal government department, such as the Veteran's Administration, or by a non government corporation, group, or individual. The guarantee protects the lender if the borrower defaults.
Home equity - The unencumbered value of an owner's home. Equity is calculated by subtracting any liens and unpaid mortgage principal from the fair market value of the home. Equity increases as loans are paid down and the home increases in value.
Home Ownership and Equity Protection Act - National law passed to encourage fair and equitable distribution of mortgage and home equity loans among persons of all races, religions and geographical origins.
Housing expense ratio (or front end ratio) - This is the portion of before-tax income used to purchase a house. As a general rule, this portion should not go above 28 percent of one's total take gross take home income.
Index - The interest rate on an Adjustable Rate Mortgage (ARM) is tied to an index, or published interest rate, which is not controlled by the mortgage lender. The interest rate and its connecting index may fluctuate. Other variable rate loans, such as credit card debt, are also connected to indexes.
Insurable title - Homeowner property deed (title) for which a title company agrees to provide coverage.
Interest rate - The yearly sum charged on a loan. Different types of loans have different rates.
Interest rate cap - A boundary or limit on much an interest rate may increase or decrease at rate adjustment periods and throughout the loan term.
Joint credit - Credit issued to a couple taking into account their combined credit histories, assets, and incomes. Both people become responsible for the debt and usually a greater amount of credit is extended.
Late payment - Payment made by the borrower to the lender that arrives after the scheduled remittance date.
Lease-purchase mortgage - Opportunity extended to a tenant to rent a home with the option of future purchase. Generally, the regular rental payments are put towards covering the initial mortgage payment, as well as, a sum towards the down payment.
Lien - A claim against property for unpaid debts or services. A lien holder may sell the property to recoup funds or recover them after the property is sold to another individual. For validity purposes, this official document must be kept on record with the County Recorder.
Life cap - Over the duration of the loan, this limit dictates how much the percentage rate can vary.
Life-cycle cost analysis - For the longevity of a property, a technique for determining the total expected upkeep and operating costs.
Lis pendens - Notice that a lawsuit involving property has been filed.
Loan application - Within the confines of this formal document, when applying for a loan, a potential borrower is required to outline his | her financial situation in great detail.
Loan application fee - An amount charged by a lender to review a loan application submitted by a potential homebuyer.
Loan-to-value ratio (LTV) - The portion of home's value purchased via the employment of a mortgage. For example, if a homeowner purchases a house for $100,000 and takes out a mortgage for $70,000, then the loan-to-value ratio is 70 percent. In the event of refinancing, this ratio is assessed based upon the appraised value of the property, rather than the original purchase price.
Low-down mortgages - Types of mortgages requiring very low down payments, in most cases, under than 10 percent. Federal loans, such as Fannie Mae's Flexible 97 and Freddie Mac's Alt 97 are examples of low-down mortgages that require borrowers only make only a three percent down payment towards the purchase price of a new home.
Low-down-payment loan - A type of loan in which the borrower makes a nominal down payment and, in turn, takes out a loan to cover the large remaining portion of the purchase price of the new home.
Maturity - The day on which the remaining principal must be paid.
Maximum financing - When the borrower makes the smallest acceptable payment amounts to the loan originator. Subsequently, these types of loans are subject to maximum financing in terms of interest rates and length of loan terms.
Monthly Treasury Average (1 year) - A measuring chart based upon the cumulative thirty day average of one-year Treasury Bills.
Mortgage - An official document which states that if the borrower were to cease making payments on the home loan, the lender would have the legal right to take ownership over the property.
Mortgage insurance - Sometimes called MI or PMI, these types of policies safeguard the lender who otherwise would be not covered should there be a foreclosure on the property or the borrower ceases to make regular payments on the principal they owe under their mortgage.
Mortgage Refinance - Situation whereby a borrower acquires a new loan | mortgage in order to cover an existing one. Reasons why borrowers take this step is to reduce their interests rates and | or liquidate cash from their home equity.
Multiple Listing Service (MLS) - The Board of Realtors generates this database that includes all 'for sale' properties in a given geographical area. The service also lists properties for lease, but does not include homes put up for sale by the actual owner.
Negative Amortization - Is a loan in which you principle balance - the amount you owe - increases every month. This occurs due to the fact that monthly payments are not sufficient to cover the interest due on the loan. The amount missing to cover the interest is then added to the principal balance. The benefit of a negative amortization loan is that a buyer can afford to buy a higher priced property, with a lower monthly payment. Buyers typically chose this loan for short term, or assuming significant appreciation in value. This disadvantage is that you will owe more than you borrowed, and your loan amount may exceed the property's value at some point.
No cash-out refinance - A mortgage that carries with it an interest rate that is lower than the costs incurred from the property's closing and the starting principal amount of the loan.
Note - A written promise to pay. Also called a promissory note.
One-year adjustable mortgage - A property loan under which the rates change every year. Rates determined by the lender are hinged upon several factors including the public index figures and established margin rates.
Original principal balance - Actual amount loaned to the prospective homebuyer.
Owner financing - Situation in which the owner of a property lends the buyer either a portion of the entire sum of the property's agreed upon purchase price.
Per-diem interest - This form of interest is charged on a 24-hour basis. Typically, the borrower pays these fees when he | she has purchased property in the middle of the month and charges need to be assessed for the interim period in-between monthly time frames. Interest in this sense is determined starting from the closing to the start of the next month.
PMI -- Private mortgage insurance - Type of mortgage policy by which the lender is safeguarded against a borrower in the event he | she neglect to make necessary payments. Included under a PMI are fees associated with foreclosures. In most instances, the lender requires this type of insurance be purchased whenever the amount of the down payment falls short of equaling 20 percent of the purchase price.
Prime for life - A highly appealing loan because of the fact the interest remains at the same fixed rate for the entire span of the policy.
Qualifying ratios - Lenders calculate these percentages to determine if a borrower qualifies for a mortgage. Lenders examine the percent of a potential borrower's before-tax income used to pay loans compared to his or her income. Two ratios are considered: first, the percent of monthly before-tax income used to make house payments (principal, interest, taxes, insurance), and second, the amount spent on other loans such as auto loans, student loans, and credit card debts. The first ratio is called the "front-end ratio" and the second is the "back-end ratio."
Rate-improvement mortgage - A loan permitting a borrower to reduce his or her interest rate once without paying refinance charges.
Refinancing - The act of taking out a second mortgage in order to cover payments on a first mortgage. Most often, the purpose for which homeowners undertake such an action is to derive interest rates that are lower than under the original mortgage or to convert equity in the home into quick money.
Rehabilitation mortgage or rehab mortgage - A process by which a homeowner | property owner borrows money for the purchase, rehabilitation and/or upgrading of a home or building.
REIT (Real Estate Investment Trust) - These funding sources invest primarily in property and mortgages and then makes investors responsible for moneys either earned via income or lost via taxes or falling property rates.
Reverse mortgage - A loan giving a senior homeowner the ability to change home equity into cash. Usually no payments are due until the senior moves, passes away, or the home is sold. The loan is due when the senior dies, moves, or sells. The final payment is calculated to not exceed the home's selling price.
Right of rescission - Provision to a borrower to cancel a loan within three days of entering into the agreement. Provision is part of the federal Truth-in-Lending Act.
Second mortgage - Loan that is considered to be adjunct to the first or original mortgage. This loan is secured by the equity of the property.
Secured debt - Term used to describe a debt, such as a mortgage loan, that is backed by a lien against a borrower's property. If the debt is not repaid, the lender may sell the property to recover the money owed.
Secured loan - Type of arrangement in which borrower has some form of backing i.e., collateral equal in value to the amount of money he | she is borrowing.
Shared-appreciation mortgage - A specific type of loan in which the lender offers the borrower an interest rate that is below market levels in agreement for a portion of the profits generated from the sale of the home.
Simple interest loan - For the policy holder, this is a method by which the payments between the principal and interest can be viewed as two separate entities. To calculate the interest owed, one takes into consideration the principal balance, time since the last payment was made and the current interest rate. The remaining balance of the monthly payment goes toward paying off the principal. Financial experts always recommend policy holders pay early and increase the amount of their payments in avoid paying additional interest charges over the duration period of the loan.
Step-rate mortgage - A type of home loan, though the rates remain fixed, the policy holder's payments begin at a small amount and gradually, over time, increase.
Sub prime mortgage - A loan to a borrower with poor credit. Because the borrower is considered sub prime, lenders charge a greater interest rate to make up for possible default on the loan.
Tax shelter - An investment method by which the principal owner is able to pay either a reduced amount of taxes or none at all on the money set aside in reserve. Note: The IRS monitors such money investment vehicles quite strictly in an effort to weed out those attempting to commit fraud or tax evasion.
Title - Exclusive ownership of property. Title, the right of ownership, is recorded in a deed. A deed is a legal document.
Title insurance - A policy certifying an owner has the title to a house and the right to transfer it to another.
Trading down - Act of a homeowner selling a home considered to be of a greater value in exchange for purchase of a home considered to be of lower worth.
Trading Up - Act of a homeowner selling a home considered to be of lower value in exchange for the purchase of a home considered to be of greater worth.
Treasury bill or Treasury note - U.S. government issued securities. The variation in the interest rate on these securities is often used as the Rate Index for Variable-rate or Adjustable Rate Mortgages (ARM).
Truth-in-Lending Act - A federal law mandating that credit terms must be given to the borrower in a standard format to aid the borrower in comparing lenders' terms.
Two-step mortgage - Type of loan in which the interest is at a set rate for the first five to seven years of the loan and then, for the duration of the loan, switches to different rate.
Underwriting - The method a lender uses to determine its risk in making a loan. Underwriting involves evaluating the quality of the borrower (i.e., creditworthiness) and the property.
Unsecured loan - Type of arrangement in which borrower has no form of backing or collateral to put forth in exchange for the money he | she is borrowing.
Usurious rate - An excessively high rate of interest for which the borrower may be being charged over what is actually the legal amount.
Variable-rate mortgage (also known as Adjustable Rate Mortgage (ARM) - On this type of mortgage the interest rate is tied to an index, or published interest rate, which is not controlled by the mortgage lender. The interest rate and its connecting index may fluctuate.
Voluntary lien - Term used to describe a legally backed action taken against a property owner in an effort to collect to an unpaid debt.
Wall Street Journal prime rate - After surveying banking institutions, the Wall Street Journal publishes this median figure indicative of average lending rates.
Wraparound mortgage - A form of refinanced loan in which all of one's previous mortgage-related debts are pooled into one lump loan agreement.