Glossary of Terms - Buyers & sellers

Amortization
Amortization is the liquidation or reduction of principal on a mortgage by making payments over a predetermined period of time.

APR - Annual Percentage Rate
APR is the cost of credit in relation to the amount financed at the onset of a loan and during the term of the loan. Lenders are required by law to state the APR on loan documents.

Appraisal
An estimate of a home or piece of real estate’s value conducted by an individual considered to be an expert on valuating a home. Appraisals typically determine the amount of money lenders will loan on a particular property.

Assessed Valuation
The valuation placed on land for purposes of taxation. The valuation does not necessarily correspond to the market valuation.

Assumption
The act of taking over a mortgage obligation incurred by the original borrower. The new owner assumes the mortgage obligations and the title to the property.

Balloon Payment
A mortgage obligation which has a balance due and payable at the end of the mortgage term which is greater than one installment payment. The final balloon payment wipes out the remaining balance.

Bridge Loan
A temporary mortgage loan to help a borrower obtain the necessary cash funds to purchase another home, prior to the sale of their currently owned home.

Buy Down
An artificial subsidy paid by someone to provide a lower interest rate to the buyer.

Cash Out
When a homeowner refinances a loan and receives cash proceeds over and above the original loan and the refinancing costs.

Closing
Process by which all the parties to a real estate transaction conclude the details of a sale or mortgage. The process includes the signing of documents, transfer and distribution of funds. I attend all of my client’s signings.

Closing Costs
Closing costs are costs buyers and sellers incur during the processing of the sale and purchase of real estate. (See the Pdxhomes.com Buyer’s section for examples of costs to be aware of).

Closing Statement
A closing statement is typically a document prepared by an attorney, Title Company or other authorized agent, giving a complete itemization of costs incurred in the transaction.

Construction Loan
A construction loan is a temporary loan necessary to provide funds to begin construction on buildings or homes.

Conventional Loan
A conventional loan is a mortgage loan made by an institutional lender without government guarantees like a VA or FHA loan.
(see the Pdxhomes.com Buyer’s section for examples)

Convertible ARM
A convertible ARM is an adjustable rate mortgage that gives the borrower the option to turn the mortgage into a Fixed Rate Mortgage during a specified time, usually for a small fee.

Conveyance
A conveyance is the transfer of title of an actual document such as a deed, by which title is transferred.

Debt Ratio
The percentage of debt in relationship to a borrower’s monthly income, used to determine if the borrower is qualified for mortgage loans.

Deed of Trust
Used in place of a mortgage in some states; title is typically conveyed to a trustee by the borrower. In this case the lender serves as the beneficiary until the balance of the loan has been paid in full.

Default
To default is to fail to meet an obligation or duty. Failure to make mortgage payments is the act of defaulting on a home in which the owner has a mortgage.

Deficiency Judgment
A Deficiency Judgment is usually employed when a lender loses money as the result of a foreclosure. The lender may seek a court decree against those liable for the mortgage in order to recoup the mortgage debt.

Discount Points
A device used to vary interest rate returns for lenders and investors. Each discount point is equal to one percent of the loan amount.

Earnest Money
A deposit of money which accompanies an offer to buy property. The deposit serves as a security to the seller and acts to show good faith on behalf of the buyer. Earnest money amounts are typically a percentage of the offering price of a home.

Equity
The value a property owner has in a property after their obligations relative to loans and other possible debts are covered.

Escrow Account
An Escrow Account is an account where funds are collected and set aside in a trust by a third party, typically to pay for taxes and insurance on the real estate in question.

Fixed Rate Mortgage
A Fixed Rate Mortgage is a mortgage loan which has a fixed interest rate and a fixed payment for the entire term of the loan.

Foreclosure
A legal process whereby a lender or seller forces a sale of a mortgaged property because the borrower has not met the terms of mortgage.

Graduated Payment Adjustable Rate Mortgage
A GPARM is a conventional mortgage that starts a borrower out with low payments which are gradually increased over a period of typically three to six years until the loan is fully amortized.

Gross Margin (Profit Margin)
Gross margin is typically referred to as the lender’s profit margin on Adjustable Rate Mortgages. The profit margin for most lenders is typically 2%.

Hazard Insurance
Also referred to as homeowner’s insurance. Hazard Insurance covers losses due to fire, vandalism and theft among other items noted in the agreement specific to the home, insurer and insured in question.

Income Ratio
The income ration is the allowable housing costs in relation to a borrower’s monthly income, used to determine if the borrower can qualify for a mortgage loan associated with a particular purchase price.

Index
A measuring device used to determine if interest rates have gone up or down over a specific period of time. Adjustable rate mortgages are typically associated with how an Index fluctuates. There are a number of different types of indexes (indices).

Interest Cap
A protective measure which limits the amount of interest that a loan may be increased or decreased by, which ultimately protects the consumer.

Life of Loan Cap
A Life of Loan Cap is a cap which covers the entire life of a loan.

Loan to Value Ratio
The relationship between the mortgage loan and the appraised value of the property, expressed as a percentage (%). An 80% conventional loan has an 80% loan to value ratio.

Lock-in-Rate
An interest rate which consumers can lock with lenders to ensure the rate does not change between the time they lock and eventually decide to buy. This option protects the buyer who wishes to ensure their rate is low and doesn’t rise when they eventually decide to purchase a home and open a loan.

Market Value
The market value of a property is determined by comparable sales, and/or the actual sale price of the home. Taxes in Oregon are based on the Market or Assessed Value, whichever is lower.

Mortgage
A lien or claim against real property given by the buyer to the lender as a form of security for the money borrowed.

Mortgage Insurance Premium (MIP)
MIP is paid by the borrower as additional insurance that the lender will be covered against a foreclosure. Mortgage Insurance premiums are required on some loans such as FHA loans. Lenders assess whether mortgage insurance is necessary for a particular loan based on a borrower’s qualifications associated with that loan.

Origination Fee
An Origination Fee is a fee charged by a lender for processing a loan. Origination fees are typically 1% of the amount of the loan that is being applied for.

Payment Adjustment Period
Payment Adjustment Periods are typically 1, 3 or 5 years and are defined as the periods between payment adjustments on adjustable rate mortgages.

Payment Cap
A Payment Cap is a cap that is placed on the amount of a borrower’s payment. In other words a mortgage payment with a payment cap can only be so much each month.

P.I.T.I. Principal, Interest, Taxes and Insurance
This acronym is used in reference to many residential mortgage loans.

Points
A point is something a lender uses to ensure their yield on a loan. A Point is typically a charge equal to 1% of a particular loan and typically a point will buy a buyer 1/5 of a percentage decrease in their interest rate for that particular loan.
If you want a 6% interest rate and all the lenders you approach can only offer 6.25 with no points you may want to think about the implications of a prepaid point to reduce the interest rate over the term of the loan.

Prepayment Penalty
A Prepayment Penalty is a charge that a lender issues the person(s) with a loan when they pay off their debt ahead of the term of the loan.

Private Mortgage Insurance (PMI)
PMI is similar to MIP, however PMI is provided by insurance companies to protect lenders issuing conventional loans from foreclosure losses.

Prorate
Prorating is typically done between a buyer and seller in order to identify who has what obligation to items associated with a piece of real estate which are prepaid or obligations incurred after the sale but associated with use and title prior.

Second Mortgage
A second mortgage is always subordinate to a first mortgage. A second mortgage is a loan incurred to purchase a property in addition to another loan of greater value. An 80:10:10 is a first mortgage of 80% of the purchase price with a second mortgage of 10% of the purchase price and 10% paid by the buyer at inception.

Secondary Mortgage Market
The secondary mortgage market is used by primary lenders to sell off their mortgages in order to make additional loans.

Title Insurance
Title Insurance is insurance against pre-existing liens, encumbrances or issues with title identified after a property has changed ownership. It insures a buyer receives title to a property as it is presented to them at the time of purchase.

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