A
Account Verification - A bank's review of your checking account use history prior to opening a new account for you. Some banks may run a full credit report to determine their level of risk. Others use the services of companies such as TeleCheck or ChexSystems. If you have a history of bouncing checks or misusing your accounts, financial institutions may not open accounts for you.
Actual Cash Value - An amount equal to the replacement value of damaged property minus depreciation.
Acceleration Clause - A provision in a mortgage note or other loan agreement that gives a lender the right to demand repayment of the entire loan balance under certain conditions, such as failure to make timely payments or a transfer of the property.
Additional Principal Payment - An amount paid by a borrower that is more than the required principal amount due. This payment reduces the remaining balance and shortens the term of the loan.
Adjustable-Rate Mortgage (ARM) - A mortgage that permits the lender to periodically adjust the interest rate on the basis of changes in a specified index.
Adjustment Date - The date on which the interest rate changes for an adjustable-rate mortgage (ARM).
Adjustment Period - For an adjustable rate mortgage, the time period between interest rate change dates, as stated in the mortgage note.
Amortization - The gradual reduction of the mortgage debt through regularly scheduled payments of principal and interest over the term of the loan.
Amortization Schedule - A timetable for payment of a mortgage loan that will allow you to own your home at the end of a specific period, such as 15 or 30 years. The amortization schedule shows the amount of each payment to be applied to principal and interest and the remaining principal balance after each payment is made.
Annual Percentage Rate (APR) - The cost of credit stated as a yearly rate. On a mortgage, the APR includes the interest rate, points, broker fees and certain other credit charges that the borrower is required to pay. On a credit card, you want to look for a low APR. If you expect to pay your bills in full each month, it will be more important to compare the annual fee and other charges, rather than APR rates.
Annual Percentage Yield (APY) - The amount of interest you will earn on a yearly basis, expressed as a percentage. The APY includes the effect of compounding. When comparing different accounts, you should compare the APYs of the savings products, not the interest rates. The higher the APY, the more interest you will receive.
Application Fee - The fee that a mortgage lender charges when you apply for a mortgage to cover processing costs. You may be charged an application fee when applying for an apartment rental.
Appraisal - A report of a real estate property's estimated value based on an analysis that includes references to the sale of comparable properties. The professional who performs appraisals is called an appraiser. Lenders usually require an appraisal to ensure that the mortgage loan amount is not more than the property's value.
Appreciation - An increase in the market value of a home due to changing market conditions and/or home improvements.
Arbitration - A process by which disputes are settled by a fair and neutral third party (arbitrator). The disputing parties agree in advance to accept the arbitrator's decision. There is a hearing during which both parties have an opportunity to be heard, after which the arbitrator makes a decision.
Asbestos - A toxic material that once was used to make insulation and fireproofing material. Because some forms of asbestos have been linked to lung disease, it is no longer used. However, some older homes still may have asbestos in these materials.
Assessed Value - The value placed on property for the purpose of taxation.
Assessor - A public official who decides on property's value for taxation purposes.
Asset - Anything of monetary value that is owned by a person or company. Examples are real property, personal property, stocks and mutual funds.
Assumable Mortgage - A mortgage loan that can be transferred from a seller to a buyer. If the mortgage contains a due-on-sale clause, the loan may not be assumed without the lender's consent. There may be an assumption or transfer fee charged to the buyer, and possibly a credit package involved in the transfer. Once a buyer assumes the mortgage, it is no longer the seller's responsibility.
Assumption - A homebuyer's agreement to take the primary responsibility for paying an existing mortgage from a home seller.
Automated Teller Machines (ATM) - A computer driven machine allows you to deposit, withdraw or transfer money from one account to another, 24 hours a day, using an ATM card. The card is issued by the bank and requires a personal identification number (PIN) for security. This special password or set of numbers protects you so that no unauthorized person can access your account. Banks may charge fees for ATM services. Most people use the ATM to withdraw cash from their accounts. If you use another bank's ATM, you may be charged an additional fee. Generally, you can make deposits only at your bank's ATM.
Automated Underwriting - An automated process performed by a computer program to streamline the processing of loan applications. The program provides a recommendation to the lender to either approve the loan or refer it for manual underwriting.
B
Balance - The amount of money in your bank account or the amount you owe on a loan.
Balance Computation Method - The way a lender calculates interest charges. The Previous Balance method has the highest finance charges, while Adjusted Balance method generally has the lowest finance charges. The Average Daily Balance is the most common method. It has lower finance costs than the Previous Balance method, but higher charges than the Adjusted Balance method.
Balance Sheet - A financial statement that shows assets, liabilities and net worth as of a specific date.
Balloon Mortgage - A mortgage requiring a large payment at the end of the loan term. These mortgages generally have very low interest rates for an initial time period (usually 5, 7 or 10 years) with low monthly payments. At the end of the period, the entire balance is due. Many borrowers pay the balance by refinancing the mortgage.
Balloon Payment - The final large payment made at the maturity date of a balloon mortgage to pay off the mortgage balance.
Bank - A business that offers you a place to keep your money and uses it to make more money. Banks offer a variety of services, such as checking, savings and certificates of deposits (CDs).
Bankruptcy - A legal process established by federal law that allows debtors with serious financial difficulties to eliminate or restructure debts. A revised federal bankruptcy law, effective in 2005, changed some bankruptcy rules and protections.
Before-Tax Income - Income before federal and local income taxes are deducted. Also known as pre-tax income.
Biweekly Payment Mortgage - A mortgage with payments due and credited every two weeks (instead of monthly). This schedule has 26 payments annually and can reduce greatly the total cost and length of the mortgage. NOTE: A bimonthly mortgage has 24 payments annually and may not reduce significantly the mortgage's cost or length.
Bond - When you purchase a bond, you are essentially loaning money to a corporation or to the government for a certain time period, called a term. The bond certificate promises that the corporation or government will repay you on a specific date with a fixed interest rate.
C
Cap - A limitation on the amount that the interest rate or mortgage payments may increase or decrease in a certain period for an adjustable-rate mortgage (ARM).
Capacity - Your ability to make your payments on time. This depends on your income and income stability, assets and reserves and the amount of your income each month that is available after you have paid for your housing costs, debts and other obligations.
Capital - Assets available to produce additional assets, such as wealth in the form of money, and personal or business property.
Certificate of Deposit (CDs) - Accounts in which money is deposited for a set period of time (e.g. six months, one, two or five years) called a term. Money in a CD usually earns a higher interest rate than in a regular savings account. The longer you promise to keep your money in a CD, the higher the interest rate. There usually is a penalty if you withdraw your money early.
Certificate of Eligibility - A document issued by the U.S. Department of Veterans Affairs (VA) certifying a veteran's eligibility for a VA-guaranteed mortgage loan.
Checking Account - An account that lets you write checks to pay bills or buy goods. The financial institution takes the money from your account and pays it to the person named on the check. The financial institution sends you a monthly record of the deposits made into the account and the checks written.
Clear Title - Ownership that is free of liens, defects or other legal claims.
Closing - The process of completing a loan transaction at which time the mortgage documents are signed, funds are disbursed and the property is transferred to the buyer, if applicable. (May be called settlement or escrow in some states.) The property deed is recorded later at the county clerk's office.
Closing Agent - The person or entity that coordinates the various closing activities, including the preparation and recording of closing documents and the disbursement of funds. (May be called an escrow agent or settlement agent in some states.) Typically the closing is conducted by title companies, escrow companies or attorneys.
Closing Costs - The person or entity that coordinates the various closing activities, including the preparation and recording of closing documents and the disbursement of funds. (May be called an escrow agent or settlement agent in some states.) Typically, the closing is conducted by title companies, escrow companies or attorneys.
Closing Date - The date on which the sale of a property is to be finalized and a loan transaction completed. Often, a real estate sales professional coordinates the setting of this date with the buyer, seller, closing agent and lender. (Also called the settlement date.)
Closing Statement - A document that lists all costs to close a real estate purchase or refinance transaction. See HUD-1 Settlement Statement.
Club Account - A type of savings account you “join” to save money for a special reason, such as holidays or family vacations. Club accounts usually require you to make regular deposits.
Co-borrower - Any borrower other than the first borrower whose name appears on the application and mortgage note, even when that person owns the property jointly with the first borrower and shares liability for the note.
Collateral - An asset that is pledged as security for a loan. The borrower risks losing the asset if the loan is not repaid according to the loan agreement terms.
Collection - The efforts a lender takes to collect past due payments.
Commission - The fee charged for services performed. In a real estate transaction an agent's commission is a percentage of the price of the house sold.
Commitment Letter - A lender's binding offer to loan money at a future date subject to the borrower's compliance with stated conditions.
Common Areas - Those portions of a building, land or improvements and amenities owned by a planned unit development, condominium project's homeowners' association or cooperative project's cooperative corporation that are used by all unit owners, who share the operation and maintenance expenses. Common areas include swimming pools, tennis courts and other recreational facilities, as well as building corridors, parking lots, entryways and similar areas.
Comparables - An abbreviation for “comparable properties.” These are used in determining a property's current value when it is being appraised. A real estate professional uses comparables to advise a seller about setting the sale price of the property.
Compensating Factors - Favorable factors that may outweigh negative factors in evaluations of credit worthiness. For example, a borrower has high debt-to-income ratios but balances this with a good credit history and cash in a savings account.
Concession - Something given up or agreed to in negotiating the sale of a house. For example, the sellers may agree to help pay for closing costs.
Condominium - A real estate project in which each unit owner holds title to an individual unit and an undivided interest in the common areas. A condominium can be an apartment building or multiple-unit housing complex.
Construction Loan - A loan for financing the cost of construction or improvements to a property. The lender disburses payments to the builder at periodic intervals during construction.
Contingency - A condition that must be met before a contract is legally binding. For example, home purchases often include a home inspection contingency under which the sales contract is not binding unless and until the purchaser has the home inspected.
Convenience Checks - A cash advance loan offered by credit card companies or other lenders that looks like, but is not, a regular check. Unlike a check, the money is charged against your credit account limit. There is a finance fee for using the check and interest charges start immediately on the amount borrowed.
Conventional Mortgage - A mortgage loan that is not insured, guaranteed or made by the federal government or federally chartered agency, such as the Federal Housing Administration (FHA), Veterans Administration (VA) or Rural Housing Service (RHS). See Government-backed Mortgage.
Conversion Option - A provision of some adjustable-rate mortgage (ARM) loans that allows the borrower to change the ARM to a fixed-rate mortgage at specified times after loan origination.
Convertible ARM - An adjustable-rate mortgage (ARM) that allows the borrower to convert the loan to a fixed-rate mortgage under specified conditions.
Cooperative (Co-op) Project - A project in which a corporation holds title to a residential property and sells shares to individual buyers, who then receive a proprietary lease as their title.
Counter-offer - An offer made in return by the person who rejects the previous offer.
Credit - A person's ability to borrow money or obtain goods with payments over time, because the lenders holds a favorable opinion of the person's financial situation and reliability.
Credit History - A record of an individual's debts and repayment. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
Credit Life Insurance - An expensive type life insurance that pays off a specific amount of debt or a specified credit account if the borrower dies while the policy is in force. Term life insurance is cheaper and offers more protection.
Credit Report - A file that contains information on where you work and live, how you pay your bills and whether you've been sued or arrested, or have filed for bankruptcy. Credit reports are used by credit card companies, banks, employers, landlords, and insurance companies. If you've ever applied for a charge account, a personal loan, insurance or job, there's a file about you.
Credit Score (FICO) - A computer-generated number that summarizes an individual's credit profile and predicts the likelihood that a borrower will repay future obligations. This number is your credit rating. Credit scores are produced by Fair Isaac Corporation and are called FICO® scores from the company's initials. Most lenders approve loans and decide what interest rate to charge based on your credit score. You have three credit scores, one for each of the three national credit reporting companies: Experian, Equifax and Trans Union. Improving your credit score lowers the cost of borrowing by qualifying you for lower interest rates.
Credit Union - A nonprofit financial institution owned by people who have something in common. You must be a credit union member to use its services. Credit unions offer members favorable interest rates on savings and loans and provide other financial services and products including check cashing, wire transfers and financial counseling. Federal credit union member accounts are insured up to $100,000 by the National Credit Union Administration (NCUA), a U.S. Government agency. NCUA also insures most state-chartered credit union accounts.
Creditor - A person to whom money is owed.
Creditworthy - Your ability to qualify for credit and repay debts.
Customer Service Representative or New Account Officer - The person who can help you open an account at a bank, savings and loan, credit union or other financial institution. The representative explains and provides written information about financial products and services, answers general questions and refers you to others who can help you.
D
Debit Card - A plastic card, sometimes called a check card. The debit card has a MasterCard or Visa logo and a magnetic strip on the back that allows payment for goods and services at businesses that accept MasterCard or Visa credit cards. When paying with a debit card, the money is immediately taken electronically from your bank account. Some debit cards also work as Automated Teller Machine (ATM) cards. These can be used to make deposits to or withdrawals from your checking account at ATMs. Some debit card may require a Personal Identification Number (PIN) if you use the card as an ATM card.
Debt - An amount owed to another.
Debt-to-Income Ratio (DIR) - The relationship between a borrower's total monthly debt payments (including proposed housing expenses) and his or her gross monthly income. This calculation is used to determine whether a borrower qualifies for a mortgage.
Deed - The legal document that transfers title (ownership) of real property from one party to another.
Deed-in-Lieu of Foreclosure - The transfer of title from a borrower to the lender to satisfy the mortgage debt and avoid foreclosure. Also called a voluntary conveyance.
Deed of Trust - A legal document that conveys title to real estate to a disinterested third party (a trustee) who holds the title until the borrower has repaid the debt. In some states, this document is used in place of a mortgage.
Default - The failure to make a scheduled payment or otherwise comply with the terms of a mortgage loan or other contract.
Delinquency - Failure to make a payment when it is due. The condition of a loan when a scheduled payment has not been received by the due date, but generally used to refer to a loan for which payment is 30 or more days past due.
Deposit (checking or saving) - Money added to your checking or savings account. To add money, you must fill out a deposit slip that tells the bank how much money you are adding to your account. Depending on whether you deposit cash, a payroll check or a check drawn on an out-of-state bank, you may not have immediate use of the funds. The bank first must make sure there are funds at the originating bank to cover your check. You may ask the bank when you can use the money you deposited.
Deposit (housing) - The amount of money you put down on the purchase of a house to hold it until financing arrangements are competed. Also called earnest money.
Depreciation - A decline in a property's value due to changing market conditions, neighborhood decline or lack of upkeep on the property.
Direct Deposit - A method by which an employer or government agency can send your paycheck or benefit check directly to your checking or savings account electronically. Some banks do not charge monthly account fees if direct deposit is used.
Discount Point - A fee paid by the borrower at closing to reduce the interest rate. A point equals 1% of the loan amount.
Diversification - A way to spread the risk of loss by using a variety of savings and investment options. The concept is: “Don't put all your eggs in one basket.”
Down Payment - Cash that a buyer puts toward a purchase.
Due-on-sale Clause - A mortgage provision that allows the lender to demand payment-in-full of the outstanding balance if the property secured by the mortgage is sold.
Duplex House - A house divided into two living units.
E
Earned Income Tax Credit (EITC) - A federal income tax credit for low-income working individuals and families. Those who qualify for and claim the credit, receive a tax refund when the EITC exceeds the amount of taxes owed. To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return. It is sometimes called the Earned Income Credit (EIC).
Earnest Money Deposit - A deposit submitted with a purchase offer to show that the offer is being made in good faith.
Easement - A right to the use of, or access to, land owned by another.
Employer-Assisted Housing - A program in which companies provide employees with financial assistance with the down payment, closing costs or monthly payments to help them purchase homes.
Encumbrance - Any claim on a property, such as a lien, mortgage or easement.
Equal Credit Opportunity Act (ECOA) - A federal law that prohibits discrimination in any aspect of a credit transaction because of an applicant's race, color, religion, national origin, sex, marital status, age, receipt of income from a public assistance program or good faith exercise of any right under the Consumer Credit Protection Act.
Equity - The owner's interest in a property, calculated as the property's current fair market value less the amount of existing liens. When referring to a home, equity is the difference between how much the house is worth and how much you owe on the house.
Escrow - An item of value, money or documents deposited with a third party to be delivered upon the fulfillment of a condition. Examples are funds you deposit with the lender to pay taxes and insurance premiums when they become due, or funds or documents you deposit with an attorney or escrow agent to be disbursed upon the closing of a real estate sale.
Escrow Account - An account that a mortgage servicer establishes on behalf of a borrower to pay taxes, insurance premiums or other charges when they are due. Sometimes referred to as an impound or reserve account.
Escrow Analysis - The accounting that a mortgage servicer performs to determine the appropriate escrow account balances, compute the borrower's monthly escrow payments and determine whether any shortages, surpluses or deficiencies exist in the account.
Eviction - The legal act of removing someone from real property.
Exclusive Listing - Written contract giving a licensed real estate agent the exclusive right, for a specified time, to sell a property.
Executor - A person named in a will and approved by a probate court to administer the disposition of an estate in accordance with the will's instructions.
F
401 (k) and 403 (b) Retirement Plans - Retirement plans offered by some private companies and non-profit organizations that allow you to deduct part of your paycheck and place it into the investment program you design. The plans allow you to choose different types of investments, depending on how much risk you want to take. Money invested in a plan lowers your taxable income. Employers usually will match a portion of your contribution, sometimes up to 50%. The funds grow, tax-free, until the money is withdrawn during retirement.
Fee - A financial institution's charge for services. For example, a monthly maintenance fee may be charged for keeping your account open. You also may be charged a penalty fee if you misuse your account, such as by bouncing a check.
Fair Credit Reporting Act - A consumer protection law that regulates the disclosure of consumer credit reports, consumer investigation reports and employment background checks by credit reporting agencies. The law is intended to promote accuracy, fairness and the privacy of personal information assembled by these private companies. It specifies procedures for challenging and correcting credit record errors. The three major national credit reporting agencies are Experian, Equifax and Trans Union.
Fair Market Value - The price at which property would be transferred between a willing buyer and willing seller, each of whom has a reasonable knowledge of all pertinent facts and is not under any compulsion to buy or sell.
Fannie Mae (Federal National Mortgage Association) - Comes from the company's initials, Federal National Mortgage Association (FNMA). A public company that operates under a federal charter and is the nation's largest source of financing for home mortgages. Fannie Mae does not lend money directly to consumers, but purchases mortgage loans from institutions that lend directly to consumers. Shares in the company are bought and sold on the New York stock exchange.
Federal Housing Administration (FHA) - An agency within the U.S. Department of Housing and Urban Development (HUD) that insures mortgages and loans made by private lenders.
FHA-Insured Loan - A loan that is insured by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD).
Finance Charge - The cost of credit, including interest, service charges and transaction fees. This charge is calculated on your balance using different methods. See Balance Computation Method.
First Mortgage - A mortgage that is the first lien or claim against a property.
First Time Home Buyer - Defined by the U.S. Department of Housing and Urban Development (HUD) as an individual and his or her spouse who have not owned a home during the three years prior to the purchase of a home.
Fixed-Period Adjustable-Rate Mortgage - An adjustable-rate mortgage (ARM) that offers a fixed rate for an initial period, typically 3-10 years, and then adjusts every six months, annually, or at another specified period, for the term's remainder.
Fixed-Rate Mortgage (FRM) - A mortgage loan in which the interest rate does not change during the entire term.
Flood Certification Fee - A fee charged by independent mapping firms to identify properties in areas designated as flood zones.
Flood Insurance - Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood hazard zones. Flood insurance is separate from a homeowner's insurance policy.
Foreclosure - The legal process by which a property that is security for a mortgage loan may be sold and the proceeds of the sale applied to the mortgage debt. A foreclosure occurs when the loan becomes delinquent because payments have not been made or when the borrower is in default for other reasons.
Forfeiture - The loss of money, property, rights or privileges due to a breach of a legal obligation.
Fully Amortized Mortgage - A mortgage in which the monthly payments are designed to retire the obligation at the end of the mortgage term.
G
General Contractor - A person who oversees a home improvement or construction project and handles aspects such as scheduling workers and ordering supplies.
Gift Letter - A letter that a family member writes verifying that he or she has given you a certain amount of money as a gift and that you don't have to repay it. This money can be used toward a portion of your down payment with some mortgages.
Good Faith Estimate (GFE) - A form required by the Real Estate Settlement and Procedures Act (RESPA) that discloses an estimate of the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the mortgage transaction. It must be provided to a borrower within three days of a mortgage loan application. The lender's estimate is not a guarantee and actual charges can be more or less.
Government-backed Mortgage - A mortgage loan that is insured or guaranteed by a federal government entity such as the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).The Rural Housing Service (RHS) guarantees loans made by private lenders, but also makes direct loans and grants to individuals and organizations.
Ginnie Mae (Government National Mortgage Association) - A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD) that guarantees securities backed by mortgages that are insured or guaranteed by other government agencies. The name comes from the initials, GNMA.
Grace Period - The grace period is the number of days you have to pay a balance before a creditor starts charging interest. Once you receive your monthly bill, you will have 2-3 weeks to pay your bill interest-free. If your credit card issuer does not provide a grace period, a finance charge may be imposed from the date you use your card or the date the transaction is posted to your account.
Gross Monthly Income - The income you earn in a month before taxes and other deductions. In some cases, it may include rental and self-employment income, alimony, child support, public assistance payments and retirement benefits.
H
Hazard Insurance - Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism or other covered hazards or natural disasters. It is required by mortgage lenders and usually is included in a homeowner's policy. Hazard insurance does not cover losses from floods.
Home Equity Conversion Mortgage (HECM) - A special type of mortgage, developed and insured by the Federal Housing Administration (FHA), that enables older homeowners to convert their home equity into cash, using a variety of payment options to address their specific financial needs. Popularly called a reverse mortgage.
Home Equity Line of Credit - A type of revolving loan account that enables a homeowner to obtain multiple advances of the loan proceeds at his own discretion, up to an amount that represents a specified percentage of his equity in the property.
Home Inspection - An examination of a home's construction, condition and internal systems prior to purchase. A satisfactory home inspection is usually a condition or contingency for closing a purchase.
Homeowner's Insurance - A broad form of insurance coverage that combines hazard insurance with personal liability protection and other coverage. It does not cover losses from flooding.
Homeowner's Warranty (HOW) - Insurance offered by a seller that covers certain home repairs and fixtures for a specified period of time. The value of this insurance is uncertain since there is no federal and little state supervision.
Homeowners' Association - An organization of homeowners residing within a particular area whose principal purpose is to ensure the provision and maintenance of community facilities and services for the common benefit of area residents.
Housing Expense Ratio - The percentage of a borrower's gross monthly income that is devoted to housing costs (principal, interest, taxes and insurance). A standard guideline is that your housing costs should not exceed 25-28 percent of gross monthly income. If your monthly gross income is $2,500, then your monthly housing cost should be $700 or less.
HUD-1 Settlement Statement - Form developed by the U.S. Department of Housing and Urban Development (HUD) to implement the Real Estate Settlement Procedures Act (RESPA). Also known as the closing statement or settlement sheet. It lists all services provided and fees charged to the buyer and seller in a mortgage transaction. Usually, a fully completed HUD-1 Settlement Statement must be delivered or mailed to you at or before the closing.
I
Income Property - Real estate developed or purchased to produce income, such as a rental unit.
Index - A number used to compute the interest rate for an adjustable-rate mortgage (ARM). The index is generally a published number or percentage, such as the average interest rate or yield on U.S. Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM.
Individual Retirement Arrangements (IRA) - A personal savings plan that gives you tax advantages for setting aside money for retirement. Contributions you make to an IRA may be fully or partially deductible from income taxes. Earnings and gains generally are not taxed until withdrawn.
Inflation - An increase, over time, in the general level of prices.
Initial Interest Rate - The original interest rate for an adjustable-rate mortgage (ARM). Sometimes known as the start rate.
Inquiry - A request for a copy of your credit report. An inquiry occurs every time you fill out a credit application and/or request more credit. Too many inquiries on a credit report can lower your credit score.
Installment - The regular periodic payment that a borrower agrees to make to repay a lender.
Installment Debt - A non-mortgage loan that is repaid in accordance with a schedule of payments (installments) for a specified term. For example, a $15,000 automobile loan can be repaid in monthly installments for 60 months.
Interest (charged) - The cost of borrowing money expressed as an annual percentage rate. See Annual Percentage Rate (APR).
Interest (earned) - The money paid to you by a bank or credit union for use of the money in your accounts. See Annual Percentage Yield (APY).
Interest Rate Ceiling - The maximum interest rate that can be charged, as specified in the mortgage note, for an adjustable-rate mortgage (ARM) note.
Interest Rate Floor - For an adjustable-rate mortgage (ARM), the minimum interest rate that can be charged, as specified in the mortgage note.
Investment - Money put to work to earn future income. Investments are made either by lending money to a borrower (Certificate of Deposit, Savings Bond) or by owning an income producing asset (stock, real estate).
J
Judgment Lien - A lien on a debtor's property, resulting from a court's decree.
Junior Mortgage (or 2nd Mortgage) - A loan that is subordinate to the primary loan or first-lien mortgage loan, such as a second or third mortgage. See Second Mortgage.
K
Keogh Funds - A tax-deferred retirement-savings plan for small-business owners or self-employed individuals who have earned income from their trade or business. Contributions to the Keogh plan are tax-deductible.
L
Late Charge/Fee - A financial penalty imposed by the lender when a borrower fails to make a scheduled payment on time.
Lease - A written agreement between a property owner and tenant that stipulates the payment and conditions under which the tenant may possess the real estate for a specified time period.
Lease-Purchase Option - Sometimes offered by a seller to a potential buyer, who rents a property and has the option to buy it within a specified time period. Typically, part of each rental payment is put aside for the purpose of accumulating funds for the down payment and closing costs. If the renter does not purchase the property, the saved funds accrue to the owner.
Liabilities - A person's debts and other financial obligations.
Liability Insurance - Insurance coverage that protects property owners against claims of negligence, personal injury or property damage to another party.
Lien - A legal encumbrance or claim on property as security for a debt. A lien is a legal claim on the home that secures the promise to repay the debt.
Lifetime Cap - For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate or monthly payment can increase or decrease over the life of the loan.
Liquidity - The ease with which an asset (a thing of value) can be turned into cash without losing its value. For example, cash is the most liquid; a certificate of deposit (CD) may be liquidated, but may have an early withdrawal penalty; a house may be the least liquid asset because of the time required to sell it.
Loan Officer - The person who takes applications for loans offered by a lender. The officer can answer your questions, provide written information explaining loan products and help you fill out a loan application.
Loan Origination - The process by which a lender makes a loan. It may include taking a loan application, processing and underwriting the application and closing the loan.
Loan Origination Fee or Underwriting Fee - Fee or charge by the lender for processing or evaluating the loan application. Often expressed as a percentage of the loan amount, usually 1% of the loan or one point.
Loan-To-Value (LTV) Ratio - The amount of money you borrow compared to the price of the property you are buying. It is the relationship between the loan amount and the value of the property (the lower of appraised value or sales price), expressed as a percentage of the property's value. For example, a $100,000 home with an $80,000 mortgage has an LTV ratio of 80%.
Loans - Money borrowed with a written promise to pay it back. Lenders charge fees and interest for your use of the money. The fees and interest are the cost of borrowing
Lock-in - An agreement in which the lender agrees to guarantee the borrower's interest rate for a set time period before closing.
Low-Down-Payment Feature - A feature of some mortgages, usually fixed-rate mortgages, that helps you buy a home with as little as a 3% down payment.
M
Market Value - The highest price a willing buyer would pay and a willing seller accept, both being fully informed, with the property offered for sale over a reasonable time period. The market value may be different from the price a property would actually sell for at a given time (market price). An appraisal is sometimes used to determine market value.
Manufactured Housing - Homes that are built entirely in a factory in accordance with a U.S. Department of Housing and Urban Development (HUD) federal building code. Manufactured homes may be single- or multi-section and are transported from the factory to a site and installed. Homes that are affixed permanently to a foundation often may be classified as real property under applicable state law, and may be financed with a mortgage. Homes that are not permanently affixed to a foundation generally are classified as personal property, and are financed with a retail installment sales agreement.
Maturity Date - The date on which a mortgage loan is scheduled to be paid in full, as stated in the note.
Merged Credit Report - A credit report issued by a credit reporting company that combines information from the three major credit companies.
Minimum Payment - The minimum dollar amount that must be paid each month to repay a loan. This is usually 2-3% of the amount owed and is often based on the balance at the billing date.
Minimum Payment Trap (Credit Card) - The payment of huge interest charges over many years, even if you do not make any additional purchases with the card. Making the 2% minimum monthly payment on a credit card balance of $4,000 will take 34 years and cost $9,843 in interest charges. Doubling the minimum payment every month will reduce the time to 10 years and $2,222 in interest, saving $7,621 of your future income.
Modification - Any change to the terms of a mortgage loan, including changes to the interest rate, loan balance or loan term.
Money Market Account - An account with an interest rate that floats with the current cost of money. Money market accounts usually pay a higher interest rate than a regular savings account and require a minimum balance.
Money Order - Similar to a check and used to pay bills or make purchases in cases where cash is not accepted. Many businesses sell money orders. The price varies from business to business.
Mortgage - A loan to finance the purchase of real estate. The borrower pledges the real estate as security, or collateral, for the loan by giving the lender a lien on the property.
Mortgage Broker - An individual or firm that brings borrowers and lenders together for the purpose of loan origination. A mortgage broker typically takes loan applications and may process loans, but generally does not use its own funds to close the loan. A mortgage brokers often acts as an independent contractor and not as an agent of the borrower or lender.
Mortgage Insurance (MI) - Insurance that protects lenders against losses caused by a borrower's default on a conventional mortgage loan. It typically is required if the borrower's down payment is less than 20% of the purchase price. Also called Private Mortgage Insurance (PMI).
Mortgage Lender - The lender providing funds for a mortgage. Lenders also manage the credit and financial information review, the property and the loan application process through closing.
Mortgage Life Insurance - A form of expensive credit life insurance that will pay off a mortgage automatically if the borrower dies while the loan is outstanding. A regular term life insurance policy costs less, gives more financial protection and offers flexibility in deciding how much, if any, of the mortgage debt to pay off.
Mortgage Rate - The cost or the interest rate you pay to borrow the money to buy your house.
Mortgagor - The borrower in a mortgage agreement who pledges property as security for the repayment of a debt; the borrower.
Mutual Fund - Investment companies that pools money from many investors into a large fund operated by a portfolio manager. The investors are shareholders of the fund. The manager invests the pool of shareholder money in various assets such as stocks and bonds. Investment objectives, financial risk and quality of management vary from fund to fund.
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Net Monthly Income - Your take-home pay after taxes and other deductions; the amount of money that you actually receive in your paycheck.
Net Worth - The value of a company's or individual's assets, including cash, less total liabilities.
Note - A written promise, such as a mortgage note, to pay a specified amount under agreed-upon conditions.
Note Rate - The interest rate stated on a mortgage note or other loan agreement.
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Offer - A formal written bid from the home buyer to the home seller to purchase a home.
Open House - When a seller or seller's real estate representative opens the seller's house to the public. A buyer does not need a real estate agent to attend an open house.
Original Principal Balance - The total amount of principal owed on a mortgage before any payments are made.
Owner Financing - A transaction in which the property seller provides all or part of the financing for the buyer's purchase of the property.
Owner Occupied Property - A property that serves as the owner's primary residence.
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Partial Payment - A payment that is less than the scheduled monthly payment on a mortgage loan.
Passbook Savings Accounts - Savings accounts that differ from regular statement savings accounts in that instead of receiving a quarterly statement, you keep a record of all transactions in a passbook. You have to take your passbook to the bank when making transactions so that the teller can update your account information.
Payment Change Date - The date on which a new monthly payment amount takes effect, for example, on an adjustable-rate mortgage (ARM) loan.
Periodic Rate - An interest rate applied to your balance to calculate the finance charge on installment debt. For example, the monthly periodic rate for a credit card with an 18% APR is 1.5% (18% divided by 12 months). Multiply a monthly balance of $1,000 by 1.5% to get the monthly finance charge of $15 ($1,000 x 1.5% = $15). The daily periodic rate for the same 18% APR is 0.04932% (18% divided by 365 days). The way the rate is applied can vary among lenders.
Personal Property - Any property that is not real property. Furniture, jewelry and television sets are examples of personal property.
PITI - A word used as shorthand for the four primary components of a monthly mortgage payment. It uses the first letter of each word: Principle, Interest, Taxes and Insurance.
PITI Reserves - A cash amount that a borrower has available after making a down payment and paying closing costs for the purchase of a home. The reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months, as stated by the lender.
Planned Unit Development (PUD) - A real estate project in which individuals hold title to a residential lot and home while the common facilities are owned and maintained by a homeowners' association for the benefit and use of the individual unit owners.
Point - An amount of money equal to 1% of the loan amount. For example, on an $80,000 loan, one point would be $800.00 ($80,000 X .01 = $800.00)
Power of Attorney - A legal document that authorizes another person to act on one's behalf. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.
Predatory Lending - Abusive lending practices involving loans made at very high interest rates to individuals who may not have the income to repay them. One type targets homeowners with low incomes or credit problems who are deceived about the loan terms or are given loans they cannot afford to repay. Another type is the payday loan also called cash advance, check advance, post-dated check or deferred deposit check loan. These small, short-term, high-interest rate loans often are repeatedly refinanced with high fees and charges and may be “packed” with expensive credit life insurance.
Pre-Qualification - A preliminary assessment by a lender of the amount it might be willing lend to a potential homebuyer. The process of estimating how much money a prospective home buyer may be eligible to borrow before he or she applies for a loan. A pre-qualification letter from a mortgage lender that states that you are pre-qualified to buy a home but does not commit the lender to a particular mortgage amount.
Pre-Approval - A process by which a lender provides a prospective borrower with an indication of how much money he will be eligible to borrow when applying for a mortgage loan. This process typically includes a review of the applicant's credit history and may involve the review and verification of income and assets available for closing. A pre-approval letter from a mortgage lender states that you are pre-approved to buy a home and does commit the lender to a particular mortgage amount subject to property appraisal.
Prepayment Penalty - A fee that a borrower may be required to pay to the lender, in the early years of a loan, for repaying the loan in full or prepaying a substantial amount to reduce the unpaid principle balance. Prepayment penalties may be included in mortgage loan and installment credit loan contracts.
Previous Balance - The amount owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges.
Principal - The amount of money owed on a loan, excluding interest. Also, the part of the monthly payment that reduces the remaining balance of a mortgage.
Principal, Interest, Taxes and Insurance (PITI) - The four primary components of a monthly mortgage payment.
Private Mortgage Insurance (PMI) - Insurance for conventional mortgage loans that protects the lender from loss in the event of default by the borrower. PMI typically is required if the borrower's down payment is less than 20% of the purchase price. It is not required on FHA- VA- and RHS-insured mortgages. This insurance is sometimes called mortgage insurance (MI).
Promissory Note - A written promise to repay a specified amount over a specified time period.
Purchase and Sale Agreement - A document that details the price and conditions for a transaction. In connection with the sale of a residential property, the agreement typically includes information about the property to be sold, sale price, down payment, earnest money deposit, financing, closing date, occupancy date, length of time the offer is valid and any special contingencies.
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Radon - A colorless, odorless gas found in the soil that can contribute to cancer and other illnesses.
Ratified Sales Contract - A contract that shows that both you and the seller of the house have agreed to your offer. The contract states the amount of your down payment, the price you will pay for the house, the type of mortgage financing you will seek, contingencies such as getting an acceptable inspection and making repairs, and your proposed closing and occupancy dates. It is a starting point for the loan application interview.
Realtors® - A real estate agent who is a member of the National Association of Realtors®. Most active agents are also Realtors®.
Real Estate Agent - Represents a broker in real estate transactions. A real estate agent is licensed by the state and is trained to sell houses, buildings and land.
Real Estate Broker - Licensed by the state to operate a real estate agency and employ real estate agents. A real estate broker arranges for the sale, purchase, lease or exchange of property for a fee.
Real Estate Professional - A person licensed to conduct real estate transactions as either a real estate broker and/or a real estate agent.
Real Estate Settlement Procedures Act (RESPA) - A federal law that requires lenders to provide home mortgage borrowers with information about transaction-related costs prior to settlement, as well as information during the life of the loan regarding servicing and escrow accounts. RESPA prohibits kickbacks and unearned fees in the mortgage loan business.
Real Property - Land and anything permanently fixed to it — including buildings, fences, trees and minerals.
Recorder - The public official who keeps records of transactions that affect real property in the area. Sometimes known as a Registrar of Deeds or County Clerk.
Recording - The filing of a title, lien or other legal documents in the appropriate public record.
Refinance Transaction - The process of paying off one loan with the proceeds from a new loan, using the same property as security.
Remaining Term - The original number of payments due on the loan minus the number of payments that have been applied.
Repayment Plan - An arrangement by which a borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.
Replacement Cost - Today's cost to rebuild your home from the foundation up. Most insurers require insurance for 100% of a home's full replacement value. Policies normally include an automatic annual adjustment for inflation and changes in construction costs. Replacement value is not the same as market value which is what a willing buyer would pay for a home.
Rescission - The cancellation or annulment of a transaction or contract by operation of law or by mutual consent. Borrowers may have a right to cancel certain mortgage refinance transactions within three business days after closing, or for up to three years in certain instances.
Revolving Credit - A line of credit that may be used repeatedly up to a specified amount. Payment may be made at the end of each billing period or over several billing periods. A finance charge is added to the unpaid balance.
Right of First Refusal - A provision in an agreement that requires the owner of a property to give one party the first opportunity to purchase or lease the property before offering it for sale or lease to others.
Risk — Return Trade-off - The correlation between degree of investment uncertainty and possibility of greater earnings. The trade-off for accepting more risk is the possibility for a higher financial return on that investment. An example of a low risk, low return investment is U.S. Savings bonds. An example of a higher risk, higher return investment is common stock in a corporation. A very high risk investment would be a penny stock sold over-the-counter.
Rural Housing Service (RHS) - An agency within the U.S. Department of Agriculture (USDA) that operates programs to help rural communities and individuals by providing loans and grants for housing and community facilities. The agency also works with private lenders to guarantee loans for purchase or construction of single-family housing.
Rule of 78s - A method for figuring interest when an installment loan, typically a car loan, is paid off before maturity. This rule, also called the sum of digits method, gets its name because the months in a one-year loan (1+2+3+4+5+6+7+8+9+10+11+12) add up to 78. A borrower pays more under this rule because most of the early payments are to interest, not principal. The Rule of 78s is not considered a pre-payment penalty.
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Savings - Money set aside for future use.
Savings Account - An account that earns interest from a credit union, savings and loan or bank. Savings accounts can be opened with a few dollars. Some may pay no interest or may charge a monthly fee if the balance is below a certain amount. Some banks provide a booklet, called a passbook to keep track of deposits, interest earned and withdrawals.
Second Mortgage - A second financing arrangement, after the first mortgage, that is secured by the same property. Second mortgages usually have a higher interest rate and a shorter term than first mortgages. Second mortgages rank behind first mortgages in priority of repayment. See Junior Mortgage.
Secured Loan - A loan that is backed by property such as a house, car or jewelry.
Securities - Financial forms that show the holder owns a share or shares of a company (stock) or has loaned money to a company or government organization (bond).
Security - The property that will be given or pledged as collateral for a loan.
Servicer - A firm that performs servicing functions, including collecting mortgage payments, paying the borrower's taxes and insurance and managing borrower escrow accounts.
Service Members Civil Relief Act (SCRA) - The federal law that allows military members to suspend or postpone some civil obligations so they can devote full attention to military duties. It protects active-duty military members and reservists and National Guardsmen who are in active federal service. Some of the benefits extend to dependents of active-duty military members.
Settlement - The process of completing a loan transaction, at which time the mortgage documents are signed, funds are disbursed and the property is transferred to the buyer (if applicable). (Called closing or escrow in some states.) Recording of the property deed is done later at the county clerk's office.
Settlement Agent - The person or entity that coordinates the various closing activities, including the preparation and recording of closing documents and the disbursement of funds. (Called a closing agent or escrow agent in some states.) Typically the closing is conducted by title companies, escrow companies or attorneys.
Settlement Costs - The costs to complete the real estate transaction. (Also called closing costs.) These costs are in addition to the price of the home and are paid at settlement. They include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs. The lender must disclose these costs to you in a Good Faith Estimate when you apply for the mortgage. The actual costs shown on the HUD-1 Settlement Statement can be more or less than the estimate.
Settlement Date - The date on which the sale of a property is to be finalized and a loan transaction completed. Often, a real estate sales professional coordinates the setting of this date with the buyer, seller, closing agent and lender. (Also called the closing date.)
Settlement Statement - A document that lists all costs to close a real estate purchase or refinance transaction.
Single-Family Properties - One- to four-unit living quarters including detached homes, townhouses, condominiums and cooperatives, and manufactured homes attached to a permanent foundation and classified as real property under applicable state law.
Soft Second Loan - A second mortgage for which payment is forgiven or is deferred until resale of the property.
Statement Savings Account - An account that earns interest and reports transactions (withdrawals, deposits, fees and interest earned) in a monthly or quarterly statement instead of a passbook.
Stocks - Shares in a company. When you buy stocks (shares), you become part owner of the company. If the company does well, you may receive periodic dividends. Dividends are part of a company's profits given to shareholders. If the company does poorly, you may lose your money.
Subordinate Financing - Any mortgage or other lien with lower priority than the first mortgage.
Survey - A precise measurement of a property by a licensed surveyor, showing legal boundaries and the dimensions and location of improvements.
Sweat Equity - A borrower's contribution to the down payment for a property purchase in the form of labor or services rather than cash.
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Taxes and Insurance - Funds collected as part of the borrower's monthly payment and held in escrow for the payment of the borrower's state and local property taxes and hazard insurance premiums.
Telephone Banking - A service that allows you to manage your account by telephone. You can check account balances, transfer money between accounts, obtain account histories (such as most recent deposits or withdrawals) stop payment on a check, obtain information on branch hours and report lost, stolen or damaged credit, debit or ATM cards. Available at banks, credit unions and savings and loans.
Teller - The person behind the counter who takes money, answers questions, cashes checks or refers you to the person who can help you. Tellers are the main contact people at the bank. You can go to any teller in the bank.
Termite Inspection - An inspection to determine whether a property has termite infestation or damage. In many parts of the country, a home must be inspected for termites before it can be sold.
Third-Party Origination - A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund or package a mortgage loan.
Title - Document indicating the legal right of ownership in the property.
Title Insurance - Insurance that protects the buyer and lender against losses from disputes over property ownership.
Title Search - A check of the public records to ensure that the seller is the legal owner of the property and to identify any liens or claims against the property.
Trade Equity - Real estate or assets given to the seller as part of the down payment for the property.
Transfer Tax - State or local tax payable when title to property passes from one owner to another.
Treasury Index - An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions by the U.S. Treasury of Treasury bills and securities.
Truth-in-Lending - A federal law intended to promote the informed use of consumer credit by requiring disclosure about its terms and costs. Creditors are required to disclose the cost of credit as a dollar amount (the finance charge) and as an annual percentage rate (APR).
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Underwriting - In mortgage lending, the process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness, ability to repay the loan and the value of the property securing the loan.
Uniform Residential Loan Application - A Fannie Mae/Freddie Mac-designed form that your lender will ask you to complete to record information about your income, assets, liabilities and the property you plan to buy. It is used to apply for a conventional one- to four-family property mortgage.
Unsecured Loan - A loan that is not backed by collateral.
U.S. Savings Bonds - A type of U.S. Treasury security. They are a long-term investment backed by the full faith and credit of the U.S. government. These bonds are an easy way to save small amounts of money and often are purchased for a child's education; however, they may be used for any purpose. Savings bonds can be purchased at a financial institution for as little as $25 or through payroll deduction.
U.S. Treasury Securities - Debt instruments by which the purchasers loan money to the government. Treasury securities are backed by the full faith and credit of the U.S. government, which means the government guarantees that interest and principal payments will be paid on time.
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Veterans Affairs (U.S. Department of Veterans Affairs) - A federal government agency that provides benefits to veterans and their dependents, including health care, educational assistance, financial assistance and guaranteed home loans.
VA Guaranteed Loan - A mortgage loan that is guaranteed by the U.S. Department of Veterans Affairs (VA).
Variable Rate Loan - A loan with an interest rate that might change during any period of the loan, as written in the contract (loan agreement). Variable rate mortgages often are referred to as adjustable rate mortgages (ARMs).
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Warranty - Written guarantee of product quality and the promise to repair or replace defective items free of charge, subject to certain conditions.
