Home Building Vocabulary

Adjustable rate mortgage (ARM) A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.

Amortization The period of time during which you will owe interest and principal to your lender.

Amortization Means Regular loan payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Amortization Schedule A schedule that provides a breakdown of the principal and interest payments, and the amount outstanding at any given point during the amortization period.

Amortize To repay a mortgage with regular payments, both the principal due and the interest.

Annual percentage rate (APR) An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal An estimate of the value of the property, made by a qualified professional called an "appraiser". An appraisal is required by your bank to determine how much money it will lend you.

Appraised value An opinion of a property's fair market value, given by an appraiser, whose job it is to evaluate such things.

Appreciation An increase in the value of a property due to changes in market conditions, or for other reasons.The opposite of depreciation.

Collateral An asset (such as a car or a home) that can be used to guarantee the repayment of a loan. You, the borrower, risk losing that asset if the loan is not repaid in a timely fashion.

Commitment A promise by a lender to make a loan, on specific terms or conditions, to a borrower or builder. It can also be a promise by an investor to purchase mortgages from a lender with specific terms or conditions.

Construction loan (or interim loan) A loan to provide the funds necessary to pay for the construction of buildings or homes. The lender advances funds to the builder at periodic intervals as the work progresses.

Down payment Money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on conventional loans.

Earnest Money Money given by a buyer to a seller as part of the purchase price, in order to bind a transaction or to assure payment.

Easement A right of way giving people other than the owner access to a property. If there is one of these on the house you're considering, make sure you understand what it is.

Encroachment An improvement that intrudes illegally on someone else's property.

Encumbrance Anything which limits the title to a property, such as leases, mortgages, easements, or other restrictions.

Equity The value an owner has in real estate over and above the obligation against the property. In other words, that portion of the property which the owner actually owns, having already paid for it. (It's also referred to as the owner's interest.) If a homeowner owns a house valued at $200,000.00 and has a mortgage of $50,000.00, the homeowner's equity is $150,000.00 (the value less the mortgage). As the value of the house increases or decreases, the homeowner's equity increases or decreases accordingly. The lender's equity is always equal to the value of the outstanding loan.

Escrow Funds that are set aside and held in trust, usually for payment of taxes and insurance on real property.

Fixed-Rated Mortgage A mortgage on which the interest rate is set for the term of the loan, regardless of future interest rate fluctuations. This makes payments precisely predictable, but it is not always the cheapest alternative.

Foreclosure A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.

Home inspection A complete and thorough inspection of the physical condition of a property, including all major systems and structural elements.It's conducted by someone who knows what to look for, and who will inform you of what he finds. If he turns up something you don't like and which the seller refuses to repair, you don't proceed with the purchase of the home.

Homeowner's insurance An insurance policy, required when you take ownership, that combines personal liability insurance and hazard insurance for the home as well as its contents.

Homeowner's warranty A warranty which will cover repairs to specified parts of a house for a specific period of time.It is provided by the seller (or, if the place is new, the builder) as a condition of the sale.

Index A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments. These other investments may include one-, three- and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans. This information is then used to adjust the interest rate on an adjustable mortgage up or down.

Initial interest rate The interest rate of the mortgage at the time of closing. This rate will change for an adjustable-rate mortgage (ARM). Also known as the "start rate" or "teaser."

Interest The amount of money, expressed as a percentage of the principal, charged for the use of the money borrowed.

Interest Adjustment If the closing (the date on which the buyer takes possession of the property) occurs at a time of the month other than the date on which the mortgage payment is due, the borrower will pay an amount to cover interest from the "interest adjustment date."

Lien A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Market Value The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Maturity The date on which the principal balance of a loan is due and payable.

Mortgage A legal contract that is registered against the title to a property in order to guarantee that a loan will be repaid.

Mortgage banker A company or loan officer at a bank that originates mortgages for resale in the secondary mortgage market.

Mortgage broker A person or company that offers loans to borrowers from numerous sources; they're generally paid a commission for their services.

Mortgage Insurance Money paid to insure the mortgage when the down payment is less than 20 percent.

Mortgage Insurance Premium (MIP) The one-half percent borrowers pay each month on FHA insured mortgage loans. It is insurance from FHA to the lender against incurring a loss on account of the borrower's default. On September 1, 1983, the MIP was changed to a one-time charge to the borrowers.

Mortgagee The lender.

Mortgagor The borrower or homeowner.

Origination Fee The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property, usually computed as a percentage of the face value of the loan.

PITI Principal, Interest, Taxes and Insurance. Also called monthly housing expense.

Points (loan discount points) Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Prepaid Expenses Money necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment A privilege in a mortgage which permits the borrower to make payments in advance of their due date.

Prepayment Penalty Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.

Primary Mortgage Market Lenders making mortgage loans directly to borrowers such as savings and loan association, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc.

Principal The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI) In the event that you do not have a 20 percent down payment, lenders will allow a smaller one - as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on you loan's structure. On a $75,000 house with a 10 percent down payment, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

Recording Fees Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Satisfaction of Mortgage The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."

Term The life span of the contract to repay a loan. Don't confuse "term" with "amortization." The term can be 6 months to 10 years. For example, a mortgage that is amortized over 20 years might have a 5-year term. At the end of 5 years the mortgage will mature. However, because the loan is amortized over 20 years, there will still be money owed on the loan. (This is sometimes referred to as a "balloon" mortgage). The borrower can either renew the loan, refinance it with another lender, or pay it off completely.