When you start shopping for a new home, you may encounter some words and terms with which you are unfamiliar. The following glossary will help you to be a better informed shopper.
Adjustable Rate Mortgage (ARM) - A loan whose interest rate is adjusted according to movements in
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 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 marketplace.
Appreciation - The increase in value of a property.
Assessment - A tax levied on a property or a value placed on worth of property by a taxing authority.
Assumption - A transaction allowing buyer of a home to assume responsibility for an existing loan on home instead of getting a new loan.
Balloon - A loan which has a series of monthly payments (often for 5 years or less) with remaining balance due in a large lump sum payment at end.
Binder - A receipt for a deposit paid to secure right to purchase a home at terms agreed upon by buyer and seller.
Buydown - A subsidy (usually paid by a builder or developer) to reduce monthly payments on a mortgage loan.
Cap - A limit to amount an interest rate or a monthly payment can increase for an adjustable rate loan either during an adjustment period or over life of loan.
Certificate of Occupancy - A document from an official agency stating that property meets 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 protections developer has made for benefit of all owners in a subdivision.
Condominium - A home in a multi-unit complex; each purchaser owns an individual unit, and all purchasers jointly own common areas, such as 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; purchasers own shares of entire complex rather than owning individual units.
Credit Rating - A report ordered by a lender from a credit bureau to determine if 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 sales price and mortgage amount on a home. The downpayment is usually paid at closing.
Due-on-Sale - A clause in a mortgage contract requiring borrower to pay entire outstanding balance upon sale or transfer of property. A mortgage with a due-on-sale clause is not assumable.
Earnest Money - A sum paid to seller to show that a potential purchaser is serious about buying.
Easement - Right-of-way granted to a person or company authorizing access to 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 value of a home and what is owed on it.
Escrow - The handling of funds or documents by a third party on behalf of 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 life of loan. The payments are not necessarily level. (See Graduated Payment Mortgage and Growing Equity Mortgage).
Fixed Schedule Mortgage - A mortgage whose payment schedule for life of 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; payments rise annually over first 5 to 10 years and then remain constant for remainder of loan. GPMs involve negative amortization.
Growing Equity Mortgage (Rapid Payoff Mortgage) - A fixed-rate, fixed-schedule loan which starts with same payments as a level payment loan; payments rise annually, with entire increase being used to reduce outstanding balance. No negative amortization occurs, and increase in payments may enable 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 mortgage.
