Property Definitions and Glossary of Mortgage Terms

Conventional Mortgage Loan

2011-10-02T16:57:00.001-07:00

: Any mortgage loan not guaranteed or insured by the government (typically through FHA or VA programs).

Dictionary: Real Property

2010-08-19T21:16:00.000-07:00

1. Rights, interests, and benefits inherent in the ownership of real estate, as distinguished from personal property; frequently thought of as a bundle of rights.

2. Real estate may be loosely defined as land (including air rights) and other properties that are permanently attached to land such as houses, fences, and landscaping.

3. The terms real property and Real Estate are often used interchangeably.

What is Alt-A, does it still exist?

2008-12-30T03:50:00.000-08:00

If you ask 5 different mortgage persons what they are, you are likely to get 5 different answers. However, most will probably be pretty close, just a bit different perspective.

"A classification of mortgages where the risk profile falls between prime and subprime. The borrowers behind these mortgages will typically have clean credit histories, but the mortgage itself will generally have some issues that increase its risk profile. These issues include higher loan-to-value and debt-to-income ratios or inadequate documentation of the borrower's income."

As real estate professionals or consumers using the services of a real estate professional you will be exposed to an onslaught of acronyms. The Alt-A -- or Alternative A-Paper (also known as prime and conforming) mortgage type is not lacking. Falling in the middle of the three general categories (oh, don't forget the government categories FHA and VA :), these are famous for their acronyms which bleed over to the Prime and sub-prime arena as well:

1. SIVA -- Stated Income, Verified Assets -- also known as "Stated"
Your income is stated, your job (not income) is verified and so are your assets

2. SISA -- Stated Income, Stated Assets
Both your income and assets are stated, but not verified, job is verified

3. NIVA -- No Income, Verified Assets
No job verification but assets are verified

4. NINA -- No Income, No Assets
Neither your job nor your assets are verified (can't understand why this caused a problem in the mortgage market :)

5. No Ratio -- No Ratio
Your Debt-To-Income Ratio is not taken into consideration

6. No Doc-- No Documentation (clever with that one)
They don't care anything about, job or assets, just credit score

All of the above are credit score driven and were as investopedia said these mortgages were typically given to clients with clean credit histories.

Many, many lenders have temporarily or permanently shut down these type of loan programs and others were put out of business b/c of their use. We still have a few brave lenders out there willing to fund these loans. Since the secondary market (where lenders and bank sell these loans and replenish their funds) lost their appetite for these, the rates have begun to climb dramatically. Only time will tell whether these loans will come back. I believe they will, but we are not likely to see the near Prime rates that we once had.

The virtues, or lack thereof, of these programs can be discussed 'til the cows come home. Feel free to comment, but I hope this provides a little introduction as to what these products were/are.

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Estates & ownership interests defined

2008-07-22T01:03:00.000-07:00

The law recognizes different sorts of interests, called estates, in real property. The type of estate is generally determined by the language of the deed, lease, or bill of sale through which the estate was acquired. Estates are distinguished by the varying property rights that vest in each, and that determine the duration and transferability of the various estates. A party enjoying an estate is called a "tenant."

Some important types of estates in land include:
Fee simple: An estate of indefinite duration, that can be freely transferred. The most common and perhaps most absolute type of estate, under which the tenant enjoys the greatest discretion over the disposition of the property.

Conditional Fee simple: An estate lasting forever as long as one or more conditions stipulated by the deed's grantor does not occur. If such a condition does occur, the property reverts to the grantor, or a remainder interest is passed on to a third party.

Fee tail: An estate which, upon the death of the tenant, is transferred to his heirs.

Life estate: An estate lasting for the natural life of the grantee, called a "life tenant." If a life estate can be sold, a sale does not change its duration, which is limited by the natural life of the original grantee.

Leasehold: An estate of limited duration, as set out in a contract, called a lease, between the party granted the leasehold, called the lessee, and another party, called the lessor, having a longer lived estate in the property.

For example, an apartment-dweller with a one year lease has a leasehold estate in her apartment. Lessees typically agree to pay a stated rent to the lessor.

A tenant enjoying an undivided estate in some property after the termination of some estate of limited duration, is said to have a "future interest."

Two important types of future interests are:
Reversion: A reversion arises when a tenant grants an estate of lesser maximum duration than his own. Ownership of the land returns to the original tenant when the grantee's estate expires. The original tenant's future interest is a reversion.

Remainder: A remainder arises when a tenant with a fee simple grants someone a life estate or conditional fee simple, and specifies a third party to whom the land goes when the life estate ends or the condition occurs. The third party is said to have a remainder. The third party may have a legal right to limit the life tenant's use of the land.

Estates may be held jointly as joint tenants with rights of survivorship or as tenants in common. The difference in these two types of joint ownership of an estate in land is basically the inheritability of the estate. In joint tenancy (sometimes called tenancy of the entirety when the tenants are married to each other) the surviving tenant (or tenants) become the sole owner (or owners) of the estate.

Nothing passes to the heirs of the deceased tenant. In some jurisdictions the magic words "with right of survivorship" must be used or the tenancy will assumed to be tenants in common. Tenants in common will have a heritable portion of the estate in proportion to their ownership interest which is presumed to be equal amongst tenants unless otherwise stated in the transfer deed.

Real property may be owned jointly with several tenants, through devices such as the condominium, housing cooperative, and building cooperative.

Zoning ordinance

2008-01-15T14:14:00.000-08:00

The division of land into residential, commercial, industrial and rural districts.

Zoning laws, which came about in the 1920s, serve to protect the public’s safety.

Zoning laws restrict the size of a lot, of building’s height and how a property can be used. In general, a residential zone is broken down into single-family, multifamily and mobile home districts.

Commercial areas are divided into retail, office and wholesale space. The government will not give you any money to compensate for a loss in your property’s value that may result from a zoning ordinance.

Wraparound mortgage

2008-01-15T14:10:00.000-08:00

A type of financing where the seller carries the buyer's loan.

Wraparound mortgages are a creative, though rare, way to allow buyers to purchase a home without having to qualify for a loan or to pay closing costs.
The contract is made between the buyer and seller with the lender’s approval.

Here is how it works:
(1) the seller holds onto the existing mortgage
(2) the seller names the property’s selling price
(3) the seller offers the buyer a loan at a higher interest rate than the
existing mortgage
(4) the buyer pays the seller a fixed monthly
amount
(5) the seller uses part of this money towards the
existing loan and then pockets the difference

Unlike an installment sales contract, the buyer gets title (ownership) of the property at closing.
This type of financing is not common since most mortgages have a due-on-sale clause.

Wraparound mortgages are also called all-inclusive trust deeds.

Verification of deposit (VOD)

2008-01-15T14:09:00.001-08:00

A document from a bank vouching for the balance of a person's checking and savings accounts.

A lender may ask for a VOD when you are applying for a loan to make sure that you actually have the money stated on your loan application.

VA loan

2008-01-15T14:03:00.000-08:00

A low-cost loan for U.S. veterans that is partially guaranteed by the Department of Veterans Affairs (VA).

If you are a veteran, you can get some VA loans without a down payment. You also can negotiate the interest rate with the lender. The loan amount cannot be more than the VA's appraisal. If it is, you have to pay the difference in cash.
You still need to pay closing costs, including appraisal and title insurance fees, as well as one-time funding fee for about 2% of the loan amount.

VA loans present high risk to a lender since the VA guarantees a portion of the loan amount- usually 25%. So, in case of foreclosure, the VA has two choices: pay the lender the loan's balance and take the property or pay the guaranteed amount and let the lender keep the property.

Usually, to be eligible for VA loan, you must have served at least 181 days of active duty or at least six years in the National Guard.

If you need information contact your regional VA office or call
1-800-827-1000.

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Unsecured loan

2008-01-15T13:49:00.000-08:00

A debt that is not backed by collateral.

Unsecured loans, like credit card debt, doctor bills and student loans, do not require you to sign an agreement pledging collateral, such as property, to secure the loan.

If you fail to pay an unsecured loan, the creditor can only take you to court to get their money. Mortgages and car loans, though, are secured loans. So, in case of default, the lender can take back the collateral-the property or the car-and sell them to pay off the loan.

Underwriting

2008-01-15T13:40:00.000-08:00

Underwriting

A lender's process to evaluate whether or not to give a borrower a loan.
When lenders underwrite a loan, they look at your income, debt and credit history to see if you are a low-risk loan candidate.

Once your loan is approved and you meet all the lender's conditions, you can sign the final loan documents.

The lender will then fund the loan.

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Two-step mortgage

2007-03-26T19:23:00.000-07:00

A type of loan that has a low interest rate for the first 5 or 7 years, then adjusts to a higher interest rate for the remaining 25 or 23 years.

Two-step mortgages are ideal for first-time buyers and if you have a job that demands that you relocate often. Your monthly loan payments are lower for those first years than a regular 30-year fixed loan, and when it is time to adjust to the higher rate, you can do so at no cost. The new rate that you get after 5 or 7 years though can be high, which is when most people decide to move. Two-step mortgages are also called resets.

See: Adjustable rate mortgage

Truth-in-lending act

2007-03-26T19:21:00.000-07:00

A federal law that requires a lender to give borrowers the annual percentage rate (APR).

The APR helps borrowers compare one loan to another since it factors in not only the interest rate but also all the fees and closing costs that you need to pay. APR, though, is not always the best measure of comparison since not all the lenders include the same fees and closing costs. The Truth-in-Lending act is also called Regulation Z.

See: APR

Trustee's sale

2007-03-26T19:19:00.000-07:00

When a lender sells your property to pay for a mortgage in default.

Most Deed of trust have a "power of sale" clause, giving the trustee, a neutral party who acts on behalf of the lender, the right to a trustee's sale. A trustee's sale varies from state to state, but in general the trustee, typically a title insurance company, advertises the property's sale in a local/count newspaper and then auctions off the property to the highest bidder.

All is not lost, you have up to five days before the sale to pay everything you owe, plus the legal fees incurred by the trustee, to get back your property. Note that some mortgages contain a power of sale clause, giving the lender the right to foreclose without taking you to court first.

See: Foreclosure, Deed of trust

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Transfer tax

2007-03-26T19:17:00.000-07:00

A state or local tax that a buyer or seller has to pay when property changes ownership.

The seller usually has to pay the transfer tax, which is paid on the closing date. The rules on how it is calculated vary from state to state, but usually it is based on the property's purchase price.

Some cities will also add a tax on top of the transfer tax.

Title report

2007-03-26T19:07:00.000-07:00

The results from a title search.

In some states, the title insurance company conducts a second title search a couple of days before closing and gives you a title report. This report makes sure that there are no claims on the property and that the seller is the legal owner of the property. If there are any claims, they must be cleared before you can buy it.

See: Preliminary title report

Title insurance

2007-03-26T18:57:00.000-07:00

An insurance policy that protects a lender and/or home owner against any loss resulting from a title error or dispute.

Most lenders require that you buy title insurance for them to protect against future problems that might arise with the title (ownership). For example, a long lost relative may show up out of the blue to refute your right to a property, claiming that the property's deed is a forgery.

Depending on where you live, you may have to pay for both your policy and the lender's policy. The cost of the owner's policy is based on the property's purchase price, about $3 to $5 per $1,000.

The cost for the lender's policy is based on the loan amount, about $2 to $3 per $1,000. You pay this one-time fee on your home's closing date.

Title insurance may also cover the charge to oversee closing, conduct the title search and the premium. If you refinance your mortgage, you only have to buy the lender's title insurance. The owner's policy protects you and your heirs until you sell your property.

Title

2007-03-26T18:54:00.000-07:00

Ownership of a property.

If you have title to a property, that means you have the right to own it.

Sometimes title can refer to the documents, such as a deed, which proves you own a property. Title documents are on public record at the county courthouse.

See: Deed

Tenancy in common

2007-03-26T18:51:00.000-07:00

A type of ownership where two or more people share ownership of a property, but not necessarily equally.

Even though the owners of a tenancy in common property can have unequal shares of the property, they all have the right to use the entire property. Unlike joint tenancy, tenancy in common doesn't have right of survivorship. So, if one of the co-owners dies, his/her interest passes to an heir(s), not the surviving co-owners. When this happens, probate court is required.

Teaser rate

2007-03-26T18:50:00.000-07:00

The initial interest rate on an adjustable rate mortgage (ARM).

Take-out loan

2007-03-26T18:49:00.000-07:00

A long-term loan taken out upon completion of a new building.

Take-out loans work together with construction loans. Here is how it works: A land developer gets a construction loan to build a cluster of homes. Then when all the homes are ready to sell, a lender offers a buyer a take-out loan to purchase one of the new homes. The builder, now taking on the role as seller, will then use part or all of the money from the sale towards paying off the construction loan. If you plan to build your own home, you can also pay off the construction loan using a take-out loan. Take-out loans are also called permanent loans.

Example: How does a builder pay off a construction loan?

The builder gets a $1 million construction loan to put up ten homes. The builder then puts up each home for sale at $300,000. The buyer gets a take-out loan for $300,000 to buy one of these brand new homes. For every home that the builder sells, the builder pays $100,000 towards the construction loan and pockets $200,000 as profit.

Sweat equity

2007-03-26T18:48:00.001-07:00

A program that gives a buyer part or all of the money for a down payment in exchange for hours of labor helping to build the home.

Sweat equity allows you strike a deal with a homebuilder to exchange hours of hard labor for 5% to 10% of your down payment. Depending on your skill set, you can do a range of construction jobs such as sand and paint walls, nail down floorboards and fit bathroom tiles.

Lenders find sweat equity programs risky because buyers often don't follow through on the amount of work required.

Super jumbo loan

2007-03-26T18:47:00.001-07:00

Any mortgage for $1 million or more.

Though not very common, lenders do provide loans for $1 million or more. A millionaire, for example, might take out a mortgage solely to benefit from the tax write-offs.

Secondary market

2007-03-26T18:46:00.001-07:00

Companies that buy groups of loans from lenders and then sell them to other lenders and investors.

The secondary market allows lenders to get more money in order to offer more loans.

Three federally-charted agencies are important in keeping a steady flow of cash available for loans: Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae).

In general, Fannie Mae and Freddie Mac buy and sell loans, and Ginnie Mae issues mortgage-backed securities, which lenders sell to investors.

Second mortgage

2007-03-26T18:44:00.000-07:00

A loan that in the event of foreclosure is paid off after the first mortgage.

You can have one or more mortgages on your property. Buyers often use second mortgages when they can not get enough financing from a lender to pay for a home. For example, you can ask the seller to reduce a home's selling price by $15,000 and offer to pay back this amount along with interest in monthly installments.

This $15,000 is secured with a second mortgage. The seller, though, is taking a risk - if you default on the first mortgage and the lender forecloses on the home, there might not be enough money from the sale to cover both the first mortgage and the seller's loan. Second mortgages usually have a higher interest to offset this risk. In some states, a second mortgage is called a junior trust deed.

Seasonal income

2007-03-26T18:43:00.000-07:00

Any income that you receive on a cyclical basis.

Here are a few examples of seasonal income:
(1) you’re not a full-time accountant, but you make money preparing income taxes during tax season, from February to April
(2) you work on a farm only during the spring as a strawberry picker. If you can prove that you have received a seasonal income for two years in a row and it is likely to continue, you can cite it as a source of income when applying for a loan to buy a home.

Sales comparable

2007-03-26T18:39:00.000-07:00

A recent sale of a property that is used to estimate the value of a similar property.

Generally referred to as comps. Comps come in handy when you are trying to set the best sale price on your home, they provide a good reference point, so you accurately price your home's value. Appraisers, certified professionals who estimate the fair market value on homes, also use comps to help them evaluate properties.

When attempting to set a price, you should use comps that were sold in the last six months and are similar to your home in age, style, size, condition and location. Real estate agents also have easy access to comps via an online network. Keep in mind that other factors, such as market conditions also affect a home's selling price.

Revolving credit

2006-10-19T19:07:00.000-07:00

A credit line that is restored as the borrower pays off what is owed

Credit cards and home equity credit lines have revolving credit. For example, you could go on a shopping spree using your Visa card and charge up to $600. As you pay off your Visa bill, your $600 credit amount will be restored and you can go for the next round of shopping. Loans, such as mortgages and student loans don’t have revolving credit.

Reverse mortgage

2006-10-19T19:05:00.001-07:00

A loan for home owners who have already paid off their mortgage but want to tap into their home’s equity

Reverse mortgages come in handy for older home owners who might have a financial hardship or who just want some extra cash without having to uproot and sell their homes.

You can either receive a lump-sum loan, a line of credit or a monthly check based on the amount of equity in your home.

This money is also tax-free, since it is a loan. When you sell your home, you use your home’s equity to pay off the loan and interest.
Keep in mind that you need to pay closing costs, such as a loan origination and processing fees.

Typically, to qualify for a reverse mortgage, you need to be over 60.

Residential loan application form (1003)

2006-10-19T19:05:00.000-07:00

The name of the standard loan application that all lenders require a borrower to complete when applying for a loan.

See: Application

Repayment plan

2006-10-19T19:01:00.000-07:00

A time table of mortgage payments over a loan’s term thats hows how much is applied to both the principal and interest.

See: Amortization schedule

Rent

2006-10-19T19:00:00.000-07:00

Payment in exchange for the temporary use of something

When you pay rent for an apartment or house, you are not building equity unless your rent payments are going towards a down payment to own the home in the future. The owner of the property is called a landlord and the renter is called a tenant. The rent is mutually agreed upon by both the landlord and the tenant, and is written into a rental agreement or lease.

Remaining balance

2006-10-19T18:58:00.000-07:00

The total amount that a borrower owes on a loan

Remaining term
The amount of time until a loan is completely paid off

If you are in your fifth year of paying off a 30-year loan, the remaining term is 25 years.

Refinance

2006-08-01T19:25:00.000-07:00

When a homeowner replaces their current mortgage with a new one

Refinancing can take several hundred dollars off your monthly mortgage payment. You replace your existing loan with another loan for the same amount, but with a lower interest rate. For example, if you trade in your $150,000 loan, 25-year fixed mortgage at 10% interest for the same loan at 7% interest, you’ll save $291 per month.

Refinancing makes sense when market interest rates drop one or more percentage points lower than your present rate. Also, you need to consider how long you plan to stay in your home to break even on the costs to refinance.

The steps to refinance are almost the same for a home purchase:

you fill out a standard loan application
the lender approves the loan based on your income, debt and credit history
you pay closing costs, such as theappraisal and processing fee

Record

2006-08-01T19:24:00.000-07:00

To make a document available to the public

Your home’s purchase is official the moment that you record the deed at the county courthouse. Usually, the title company or escrow agent is responsible for recording the deed and you will be responsible for a small fee. If you wanted to do a little investigating into the former owners of your home, you could go to the county clerk’s office and check the files - this list of owners is called the chain of title.

Any claims on your home, including a mortgage and liens for unpaid debts, are also recorded there. The county clerk who records a deed can be called the county recorder or the registrar of deeds.

Real property

2006-08-01T19:23:00.000-07:00

Land and anything permanently attached to it

Your home, your backyard, and even your roses planted in the yard are examples of real property. Real property can not be moved or taken away without lawful permission. If you want togive or sell someone real property, you must use a document called a deed.

Real Estate Settlement Procedure Act (RESPA)

2006-08-01T19:21:00.000-07:00

A federal law that says a lender must give a borrower an estimate of closing costs within three business days of applying for a loan

After you apply for a loan, the lender must give you a Good faith estimate within 3 business days. The Good faith estimate is a document with a detailed breakdown of the costs that you will need to pay at closing. RESPA also requires that lenders give you a Uniform Settlement statement or HUD-1 before or at closing, which lists the final closing costs.

This law isn’t taken lightly - if lenders don’t supply you with this information, they’ll be slapped with a $10,000 fine and possibly jail time.

Rate lock

2006-08-01T19:19:00.000-07:00

A lender’s guarantee on a specific interest rate

Until you request a rate lock, a loan’s interest rate quoted by either a lender or broker is apt to change due to market fluctuations. The rules on how to do this will vary from lender to lender and broker to broker, but typically you can request a rate lock after you submit your signed loan application (1003) and other requested forms.

Do not let a low rate slip through your fingers. Once you have settled on a rate, the lender usually guarantees the rate for 15, 30, 45 or 60 days. Rate lock is also called lock-in rate.

A loan with a fixed interest rate

Quitclaim deed

2006-08-01T19:16:00.000-07:00

A document that can be used to both transfer ownership of property and to release a person’s claim on a property

Out of all the deeds used to exchange ownership of a home, quitclaim deeds are used the least since they do not give buyers a firm assurance that the seller is the home’s legal owner. Quitclaim deeds are usually used to clear up a variety of simple ownership (title) issues.

For example, Mr. and Mrs. Jones buy a home together, but 10 years later Mrs. Jones wants to separate and wants nothing to do with the property. She just has to sign a quitclaim deed to release her claim on the property.

Principal

2006-06-27T14:37:00.000-07:00

The amount borrowed on a loan

If you take out a loan for $100,000, the principal on the loan is$100,000. You repay the principal plus the interest and fees over the life of the loan. As you continue to pay off your loan, more and more of your payment goes to the principal, and slowly but surely the amount due shrinks away.

See: Amortization

Prequalification

2006-06-27T14:35:00.000-07:00

When a lender or broker figures out how much you qualify to borrow

Before shopping for a home, you can save yourself a lot of time by first finding out whether or not you are likely to qualify for the loan you want. Also, you will also get a rough idea of the price range that you can afford on a home. To do this, a lender or broker will look at your income, debt, assets and credit history.

I fall goes well, you will receive a prequalification letter that you can then show Realtors, so they feel confident about investing time and energy in your home search.

Prepayment penalty

2006-06-27T14:31:00.000-07:00

A fee that lender charges home owners if they pay more that is required on a monthly loan payment, or pay off the loan before its term ends

Loans with a prepayment penalty usually have a lower interest rate. But, in exchange for what seems a sweeter deal, you’ll be slapped with a whopping penalty of up to 3% of your loan’s amount if you decide to pay off the loan on your home, or refinance within the first 3 years of buying your home.

The penalty also applies if you pay more than 20% of your unpaid loan balance in any year during this time. So, if market rates drop in the second year of owning a home, you may miss outon an opportunity to refinance to get lower monthly loan payments.

Prepayment

2006-06-27T14:28:00.000-07:00

A clause that allows a borrower to make larger (oradditional) payments than the amount stated in the loan agreement

It’s in your best interest to make extra or bigger monthly payments on your loan since this will reduce your loan balance quicker than if you only paid the amount that’s due. You’ll also cut down the interest that you need to pay.

Prepayment is also called the "or more clause."

Prepaid items

2006-06-27T14:25:00.000-07:00

Fees paid on the closing date to cover future costs like property taxes, interest, mortgage insurance and hazard insurance

Lenders want to make sure that their investment is secure, so they may require you to deposit a sum of money in an escrow account to prepay recurring costs, such as:
(1) your first six months of property taxes
(2) your first two months of hazard insurance
(3) your first two months of mortgage insurance, if required

Premium

2006-06-27T14:24:00.000-07:00

Regular payments made on an insurance policy

Insurance companies usually charge an annual premium when you open a home owner’s insurance policy. For example, if you live in an area that is prone to earthquakes or floods, your premium will be higher to offset the extra risk that an insurance company takes.

Preliminary title report

2006-06-27T14:23:00.000-07:00

The results of a title search on a property

Before you go to closing, you will receive a preliminary title report from a title company. This report proves that the seller is the rightful owner of the property that you want to buy, and lists any claims against the property for unpaid debts, such as property taxes and income taxes. Be sure to bring any claims that need to be cleared to the seller’s attention.

Preapproval

2006-06-27T14:22:00.000-07:00

When a lender commits to a loan before the borrower finds a property to buy

Even if you have not found a property, some lenders will give you a written preapproval on a loan.
The benefits to getting a preapproval are:
(1) you know exactly what you can afford to offer for a home
(2) you show a seller and your realtor how serious you are about buying a home

To get a preapproval, you have to fill out a standard loan application. Keep in mind that you the lender can only guarantee (lock) the loan’s interest rate once you have found a property.

Portfolio loan

2006-06-27T14:18:00.000-07:00

A loan that a lender holds onto instead of selling on the secondary market

Lenders pool and sell most loans to the secondary market in order to create money for more loans. But, to keep their in-house assets at a certain level, lenders keep some loans in their "portfolio." Since portfolio loans don’t have to stick to the rules set by secondary market institutions, like the Federal National Mortgage Association (Fannie Mae), they have some appealing qualities, like letting you borrow large amounts.

But, you may have to come up with a sizable down payment, or accept a high interest rate. Lenders who offer portfolio loans usually don’t ask for heaps of documents to prove your income or assets.

Point

2006-06-27T14:17:00.000-07:00

One percent of the total loan amount

Loan rate points can be either positive (discount points) or negative (rebate points).

The more positive points you choose to pay up-front, the lower your interest rate will be. For every point you pay, your rate will go down by about .25%.
On the other hand, you can opt for a loan with a higher interest rate in exchange for a rebate, which will give you a credit towards paying some of your non-recurring closing costs, such as title insurance, appraisal and origination fee.

can’t get any cash back from You rebate points.

Planned Unit Development (PUD)

2006-06-27T14:16:00.000-07:00

A type of housing project that has five or more individually owned homes and each owner has a share of the common areas

PUDs are generally found in suburban areas. You own your home and the land it’s on, as well as a part of the areas that you share with other home owners, like the grounds and swimming pool. Similar to a condominium, you have to pay an owner’s association monthly fees to maintain the common areas.

Piggy back loan

2006-06-27T14:14:00.001-07:00

A second loan on a home, usually up to 15% of the property’s purchase price

If you can make a 10% down payment on a home, one way to avoid paying for Private mortgage insurance (PMI) is to get two loans.

Here is how it works: you get a loan for 80% of a property’s purchase price at a standard interest rate and then get a second, "piggy back" loan at 10% of the purchase price, though at a higher rate.

This type of financing is commonly called 80-10-10. If the first loan is less than $227,150, you can opt for a 75-15-10 arrangement, which will give you a lower interest rate on the first loan. To figure out if getting a second loan makes sense for you, compare your monthly costs with a piggy back loan versus PMI.

Personal property

2006-06-27T14:14:00.000-07:00

Anything that you can own that is considered movable

Money, furniture, cars, clothes, even pets are examples of personal property. Land and anything attached to it is not personal property, but real property. You can move personal property from one place to another, and you can sell or buy personal property with or without a written contract.

Permanent loan

2006-06-27T14:11:00.000-07:00

A long-term loan taken out upon completion of a newbuilding

Permanent loans work together with construction loans.

Here is how it works: land developers who buy large pieces of land to build homes on will first take out a construction loan on the property, which covers the entire lot.
Then, when all the buildings are ready to sell, the lender offers each home buyer a permanent loan. Part or all of this money will go towards paying off the construction loan.

Permanent loans are also called take-out loans.

Payment cap

2006-06-27T14:09:00.000-07:00

A limit on how much the monthly payments on an adjustablerate mortgage (ARM) can go up or down.

Some ARMs have a payment cap, which is normally around 7.5%. Caps on monthly payments are rare since they can cause negative amortization, a situation where your mortgage balance increases despite regular monthly payments.

Example: How can a payment cap cause negative amortization on a $200,000 loan at 6% interest with a 7.5% payment cap?

If your interest rate goes up to 8%, you now have to pay $712per month, up from $589. However, since you have a payment cap of 7.5%, the maximum that you have to pay is $634 ([$589X 7.5%] + $589). Who eats the $44 difference?
If the lender allows negative amortization, you have the choice to pay either the $634 or $712. If you opt to pay the lower amount, the$44 is added to your loan’s principal, increasing the size of your loan.

Origination fee

2006-06-27T13:56:00.000-07:00

A service fee charged by a lender and broker that the borrower pays on the closing date

All lenders and mortgage brokers charge an origination fee,which can be as much as 2.5% of the loan amount. Online mortgage brokers generally charge much less.

Sometimes lenders will refer to this fee in terms of origination points, where 1 point equals 1% of the loan amount. Unlike discount points, you can’t deduct the origination fee from your income taxes since it’s just a service charge, not interest.

See: Closing costs

Negative amortization

2006-06-13T19:49:00.000-07:00

When the amount that you owe on a loan increases despite regular monthly payments

Negative amortization typically happens with an adjustable rate mortgage (ARM) that has a payment cap. This means that your monthly payment can only increase up to 7.5% from the last adjustment period.

Here’s how this type of loan works: the lender gives you three options on how to pay your monthly loan payment.

Typically, you can pay either:
(1) the full amount that's due, which covers both the principal and interest
(2) the amount based on the payment cap
(3) interest only

If you select the second method, you are at risk of negative amortization - if the loan's interest rate shoots up, you owe more money than what the payment cap accounts for. This unpaid interest is then tacked onto your loan. So, your loan balance creeps up instead of shrinking. Similarly, with the third method, the amount that's not paid on the principal is added to your loan.

This type of loan makes sense for people and companies who have seasonal or staggered incomes, or for people who want more flexibility and can manage their finances with daily updated spreadsheets.

See: Adjustable rate mortgage, Payment cap
Compare: Amortization

Mortgage Insurance (MI)

2006-06-12T18:00:00.000-07:00

An insurance contract that protects the lender against loss if a borrower can not repay a loan

If your down payment (or equity) is less than 20%, a lender will require you to buy MI. This is a lender’s safety net in case you default on the loan and the lender forecloses on your property. The lender will use the money collected from MI to offset any losses.

How much you need to pay each month in insurance depends on the loan amount, the type of loan and the downpayment. Typically, it costs between 0.15%, to 2.5% of the loan amount. You might also have to pay one or two months worth of payments when you close on your home.

The good news is that you may not have to pay MI forever – some lenders let you end the policy when, based on an appraisal, you show a lender that you have at least 20% equity in your home. MI is also called Private mortgage insurance (PMI).

See: Insurance, Foreclosure, Appraisal/Appraiser, Down payment

Mortgage broker

2006-06-12T17:57:00.000-07:00

A company that helps a borrower get a loan in return for a fee

Mortgage brokers don’t lend money - they help you shop for the best loan from a selection of lenders. Since mortgage brokers get discounted rates from lenders, you can get a lower rate from a broker than if you apply for a loan directly from a lender. Online mortgage brokers also charge significantly lower fees than traditional brokers, who can charge up to 2.5% of the loan amount.

Once you apply for the loan, the mortgage broker handles all the documents and works with the lender to make sure your loan gets approved. The mortgage broker may also order a copy of your credit report, the property appraisal and the title insurance. You pay a mortgage broker at closing, when you complete your home’s purchase or refinance.

See: Insurance

Stop my foreclosure

A loan with a fixed interest rate

Mortgage

2006-06-12T16:16:00.000-07:00

A document that pledges your property as security for a loan’s repayment

If you can not repay the loan on your home, a mortgage gives the lender the right to foreclose on the property and sell it to get back their money. A deed of trust serves the same purpose as a mortgage, however some states traditionally use one or the other - in some cases both, depending on the custom in each county. With a mortgage, the lender must go to court to foreclose on a property.

See: Foreclosure

Maturity

2006-06-12T16:12:00.000-07:00

A claim placed on a home by someone who didn’t receive payment for construction work completed on the property

Almost all states allow workers who make improvements on a property, including contractors, painters, architects, carpenters, plumbers and even the gardener, to put a lien against your home if you don’t pay them. This lien will appear on a preliminary title report and you cannot sell the property until you pay it.

Though not common, a mechanic’s lien can lead to a foreclosure, which is when the creditor gets a court order tohave your home sold to pay off the debt. The "mechanic" has up to 90 days to get the court order, if they miss the time frame they can still sue you for the money owed.

See: Lien

Lock period

2006-06-12T16:04:00.000-07:00

The amount of time that a lender will guarantee a loan’s interest rate

Once you have locked in an interest on a loan, the lender will guarantee that rate for a certain period of time, usually for 30, 45 or 60 days (Normally, the longer the lock period, the more points that you have to pay up-front since the lender is taking agreater risk when they guarantee a rate for a long time).

You will need to complete your home’s purchase or refinance within the lock period. If you need extra time, you may have topay up to 1 point (1% of the loan amount) or more, and there’sno guarantee that you can keep your original interest rate after the expiration date.

See: Rate lock

Lock-in rate

2006-06-12T16:02:00.000-07:00

A lender’s guarantee for a specific interest rate on a loan

Until you request a rate lock, a loan’s interest rate quoted by either a lender or broker is probably going to change due to market fluctuations. The rules on how to do this will vary from lender to lender and broker to broker, but typically you can request a rate lock after you submit your signed loan application/1003 and other requested forms. Don’t let a low rate slip through your fingers. Once you have settled on a rate, the lender usually guarantees the rate for 15, 30, 45 or 60 days.

See: Lock period

Loan-to-value ratio (LTV)

2006-06-12T15:58:00.000-07:00

A percentage that shows how much equity a borrower will have in a home

LTV compares how much a person plans to borrow versus the property’s value. For example, a 90% LTV loan that means you want to borrow 90% of the home’s price and will have a 10% down payment (or equity if you're refinancing).
This gives you 10% equity in your property.

All lenders use LTV as a guideline to figure out if you’re a high-risk loan candidate. The higher the LTV, the more risk that a lender takes, causing them to carefully examine your finances. Also, if your LTV is over 80%, the lender requires that you buy Private mortgage insurance (PMI).

See: Down payment, Equity, Private mortgage insurance

Loan processor

2006-06-12T15:53:00.000-07:00

The person who collects and organizes all the documents required by the lender to approve a loan

The loan processor has the important task of making sure that a lender has all the information needed to approve your loan, including your credit report, W-2 form, pay stub and signed loan application. The loan processor will also order your title insurance and arrange the property’s appraisal.

The processor works for either a lender or a broker.

Loan origination fee

2006-06-12T15:48:00.000-07:00

A service fee charged by a lender and broker that the borrower pays on the closing date

All lenders and mortgage brokers charge an origination fee, which can be as high as 2.5% of the loan amount. Online mortgage brokers charge significantly less. Sometimes lenders will refer to this fee in terms of origination points, where 1 point equals 1% of the loan amount. Unlike discount points, you can’t deduct the origination fee from your income taxes since it is just a service charge, not interest.

See: Closing costs

Loan

2006-06-12T15:27:00.000-07:00

A sum of money that a lender gives to a borrower that must be repaid along with interest

There are many types of loans to choose from when you are looking to buy a home. Each loan will have a different interest rate and term, which will affect how much you have to pay each month. How much you put towards a down payment will also affect your monthly payment. The three most common types of loans are fixed rate, adjustable rate, and balloons. A home loan is also called a mortgage.

See: Fixed rate mortgage, Adjustable rate mortgage, Balloon mortgage

Liquid asset

2006-06-12T15:25:00.000-07:00

Any item of value that can be quickly turned into cash

Your liquid assets are the easiest to cash, which is especially helpful when you are gathering money for a down payment on a home. The best examples of liquid assets are certificate of deposits (CDs) and money market accounts. Real estate, boats, antique furniture, and collectible plates are not liquid assets since they take time to sell.

Lifetime rate cap

2006-06-12T15:21:00.000-07:00

A limit on how much the interest rate on an adjustable rate mortgage (ARM) can go up or down over the life of a loan

The average lifetime rate cap is 5 to 6 percentage points over an ARM’s initial interest rate. So, for example, if your initial interest rate is 6% and the lifetime rate cap is +5%, your rate can’t go beyond 11% over the loan’s term. The maximum lifetime rate cap is often called the ceiling thus, the minimum lifetime rate cap is called the floor.

See: Cap, Adjustable rate mortgage

Lien

2006-06-12T15:18:00.000-07:00

A claim placed on a property to make sure that a debt is repaid

The mortgage on your home is a voluntary lien – you agree to put up your home as a guarantee that you’ll repay the loan. Creditors, like the IRS or someone who has won a civil court suit against you, can also have a lien put on your home, but without your permission. All liens must be paid off before you can sell or will your property to someone.

See: Judgment lien,Mechanic’s lien, Foreclosure

Liability

2006-06-12T15:15:00.000-07:00

Any debt that you are responsible to repay

Lenders want to know what liabilities you have to see if you’re a high-risk candidate for a loan. Liabilities include car and student loans, credit card debt, child support, insurance premiums and alimony. The fewer liabilities that you have, the more confident a lender feels about giving you a loan.

See: Acceptable debt

Lease

2006-06-12T14:41:00.000-07:00

A rental agreement between a landlord and a tenant that lasts for an agreed period of time
A lease must include a property’s description, the date the lease expires, the price of the rent, and the landlord’s signature. Even though it is common practice for both the tenant and landlord to sign a lease, the lease is legally binding if only the landlord signs it. Also, by law, a landlord can take back a property when the lease ends.

Leasehold Estates
Estate for years: A tenant that has a lease for a set period of time.
The rent must remain the same until the lease expires.

Estate from period to period: A tenant with a lease that lasts month to month. The lease is automatically renewed at the end of each month. The tenant has to give 30 days notice.

Estate at sufferance: When a tenant lives on a property without the landlord's permission or paying rent.

Estate at will: When there is no lease between the tenant and the landlord.

Jumbo loan

2006-06-12T14:12:00.000-07:00

Any loan that allows you to borrow more than an amount set by the Federal National Mortgage Association (Fannie Mae)

If you want to borrow over $240,000 for a single-family home, or over $307,100 for a two-family home in the continental US, you have to apply for a jumbo loan. In Hawaii and Alaska, you need a jumbo loan if you plan to borrow over $360,000 for a single-family home or over $460,650 for a two-family home.

Most commercial lenders agree to use these guidelines, which are set by the Federal National Mortgage Association. Jumbo loans have higher interest rates and fewer financing options, and are also called non-conforming loans.

Judgment

2006-06-12T14:09:00.000-07:00

The final decision made by the court to settle a lawsuit

A court often awards money judgments, which are payments for damages or claims that were presented in court. A creditor can also sue you and get a judgment that puts a lien on your property, so it can be sold to pay your debt. A judgment can be partially or completely changed, if you win an appeal.

Investment property

2006-05-16T11:44:00.000-07:00

Any property that you buy to make a profit - either from renting or selling it

Investing in real estate can be extremely profitable venture –it is considered a long-term investment and the way to make money is to have equity, which is the money that you keep after the mortgage is paid off.

The three main ways to build equity are:
(1) your down payment when you purchase
(2) paying off the loan’s principal, which may take several years since your first years’ payments go primarily towards the interest
(3) the increase in the home’s value when the property appreciates.

Interest rate cap

2006-05-16T11:43:00.000-07:00

The limit on how much the interest rate on an adjustable rate mortgage (ARM) can go up or down

Most ARMs have two types of interest rate caps:
(1) lifetime caps, which are required by law, that limit the increase and decrease of a rate over the full course of a loan. A 6% lifetime cap, for example, means the rate cannot go beyond 6 percentage points over or under the initial rate
(2) periodic caps, which limit the rate change from one adjustment period to the next, even if the market interest rates significantly rise or fall during this time. A lifetime cap is also referred to as aceiling or floor.

See: Cap

Interest/Interest rate

2006-05-16T11:41:00.000-07:00

The cost for borrowing a lender’s money

Interest takes into account the lender’s risk and how much it costs the lender to get the money for a loan. The more risk the lender takes, the higher the interest rate they charge you. You pay a small portion of the interest that you owe in each monthly loan payment.

The interest rate on a fixed rate loan depends on the going market rate and how many discount points that you payup-front. An adjustable rate loan’s interest rate is made up of the index, which is an economic indicator of overall interestrates, and the lender’s margin.

Installment

2006-05-16T11:31:00.000-07:00

Regular payments given to a lender to repay a mortgage

You usually pay off a mortgage in monthly or biweekly installments. If you have an escrow or impound account, your installment can be broken down into four parts, often referred to as PITI: loan principal, loan interest, property taxes and hazard insurance.
So, every month, lenders collect one-twelfth of your annual property taxes and hazard insurance to place into the account. So, when these bills become due, the lender can readily pay them off.

Initial interest rate

2006-05-16T11:30:00.000-07:00

The starting interest rate of an adjustable rate mortgage (ARM)

The initial interest rate on an ARM, sometimes called a teaser rate, is fixed for a certain period then adjusts to reflect overall market rates. The lender starts you off with a very low initial rate, planning that interest rates will rise in the future and adjust to market rates.

Fixed rate loans, on the other hand always have the same interest rate for the life a loan, and the rate is usually higher than an ARM’s initial interest rate.

Inflation

2006-05-16T11:28:00.000-07:00

A decrease in the value of money

Inflation is a measure of the increase in the price of goods. Inflation generally affects your buying power - If you buy 10 ice cream cones with $10 one day, and inflation rockets up 10% the next day, you’ll only be able to buy 9 ice cream cones with your $10.

Inflation usually causes interest rates to rise. This is when it pays to have a fixed rate loan, rather than an adjustable rate loan since the interest rate doesn’t increase to match the market rates.

Inflation can also affect property values: if your home is worth$100,000 and inflation goes up 10%, your home is now worth $110,000.

An appraiser, though, usually adjusts their calculations to account for inflation when figuring out the market value of a property. Also, there are many factors that work together to influence property values that may offset inflation, such as supply and demand and a neighborhood’s condition.

Inflation levels in the U.S. are stable and fluctuate between 3% and 6%.

Income property

2006-05-16T11:24:00.000-07:00

Any property, including land, which earns you money

Renting out a home that is not your primary residence is one way to use property to make money. An income property, like an apartment building with more than four living units, is normally appraised, mortgaged and taxed differently than a primary, owner-occupied residence.

Distance also plays a factor in creating a loan package for an income property.

Impound account -- Escrow Account

2006-05-16T11:22:00.000-07:00

An account used to pay your hazard insurance, mortgage insurance and property taxes

An impound account is set up by the lender for you to prepay certain recurring costs at closing, such as your first six months of property taxes, your first two months of hazard insurance, and your first two months of mortgage insurance, if required.

From then on, you pay these bills from this account. Some lenders let you waive the impound account, but may tack on additional points to your closing costs if you choose to not have one.

Home equity loan

2006-05-01T03:55:00.000-07:00

A loan that allows home owners to borrow against the equity in their property

A home equity loan lets you use your equity, the value of your home minus what you owe, as a guarantee that you will repay the loan. Depending on the lender, you could borrow between 80% to 100% of your home’s equity, and sometimes more. Homeowners often apply for home equity loans to pay college tuition, to make major renovations on a home, or to pay off credit card debt.

Home equity loans have a fixed interest rate and payment for usually 10 to 15 years. Since these loans are riskier than mortgages for lenders, the interest rates are higher.

Keep in mind that you still have to fork out closing costs, such as the processing and appraisal fees.

Home equity line of credit

2006-05-01T03:52:00.001-07:00

A line of credit, secured by a property, that allows owners to tap into their home’s equity

You can get a line of credit equal to your home’s equity that works like your checking account or credit card. Equity is the difference between the value of your home and the amount you owe on your mortgage.
It’s flexible, so, if your equity is $20,000, you can withdraw at will up to this amount simply by writing a check.

Note that you’ll have restrictions on how much you can withdraw at one time. You only pay interest on what you borrow and your credit limit is restored as you pay back what you owe. A home equity line of credit typically stays open for 10 years. Once it closes, you normally have 10 to 15 years to pay back what you owe.

The added bonus is that the interest you pay can be deducted from your taxes. But this isn’t free money, if you can’t repay the credit line you could risk losing your home.

Grantor

2006-04-19T20:18:00.000-07:00

A term for a person who hands over ownership of a property to someone else

When you sell your home, you become the grantor since you transfer the rights to your property to the buyer.

Grantee

2006-04-19T20:17:00.000-07:00

A term for a person who becomes the new owner of a property

When you buy a home, you become the grantee when you receive a property’s deed, signaling that you are the new owner. If you use decide to add a family member or spouse onto your property’s title, they also become grantees.

Grant deed

2006-04-19T20:16:00.000-07:00

An official document that is used to transfer a property’s ownership

A grant deed is the most common type of deed used to transfer property from a seller to buyer. Grant deeds are used for properties that are mortgaged and not mortgaged.

Upon closing of the property’s purchase/sale, the title company records the grant deed at the county courthouse and sends the buyer the original in the mail. In order to use a grant deed, the property must be clear of any claims.

Government National Mortgage Association (Ginnie Mae)

2006-04-19T20:15:00.000-07:00

A federal corporation that insures mortgage-backed securities, and offers financing options to home buyers

The official web site of the Government National Mortgage Association (Ginnie Mae).

Good Faith Estimate

2006-04-19T20:12:00.000-07:00

An estimate of the total costs to get a loan when buying or refinancing a home

After you apply for a loan, a lender or broker is required by law to give you a Good Faith Estimate within 3 days. The costs will include lender and broker fees, loan-related fees, and third-party fees, such as the title insurance and appraisal.

Most of these fees must be paid on the closing date, the day when the sale or purchase of a home is completed.

Gift

2006-04-19T20:07:00.000-07:00

A sum of money given to a home buyer as a present

If relatives or a friend give you a helping hand towards your down payment, a lender will require that you complete and sign a form, called a gift letter, proving that the money doesn’t have to be repaid.

A lender will then request a copy of the gift-giver’s bank statements to prove that he/she actually has the sum of money stated in the gift letter. When the funds are transferred into your banking account, you also need to give the lender a receipt of the transaction.

Full disclosure

2006-04-18T19:43:00.000-07:00

When all the facts are revealed about a property’s condition, sale or financing

There are both federal and state laws that require that the broker, seller and lender make certain information readily available to the buyer - anything that can affect the buying decision.

For example,
(1) a seller should tell a home buyer if there are any problems with a property and
(2) before a broker can charge a commission, the buyer/seller must be informed and agree to the terms.

Forfeiture

2006-04-18T19:42:00.000-07:00

When home buyers lose the money that they paid to a seller to secure a purchase

Home buyers normally give the seller a sum of money, called a deposit, to convey how serious they are about buying the property. If the deal works out, their deposit is applied to the buyer’s closing costs.

But, if the deal breaks down, who finally pockets the deposit money will depend on specific clauses and contingencies written in the sale/purchase contract.

Foreclosure

2006-04-18T19:39:00.000-07:00

When a lender takes possession of a home and sells it in order to repay a loan in default

When a homeowner can not repay (defaults on) the mortgage and negotiations for an alternative payment plan fail, the lender has no choice but to start the foreclosure process. This process varies from state to state, but in general, a foreclosure is an auction either with or without court action. The sale must be advertised in local newspapers and the highest bidder wins the home. Since the lender only bids on what is owed, a buyer can often find a good deal, especially on an older home.

You still get one final chance to keep your home by paying off all delinquent costs either before the sale or in a judicial foreclosure, before the court approves the foreclosure. Having a foreclosure on your credit is very serious business, often worse than bankruptcy.

Stop my foreclosure

A loan with a fixed interest rate

Fixed rate mortgage

2006-04-18T19:35:00.000-07:00

A loan with the same interest rate and payment for the life of the loan

When you lock in the interest rate for a fixed rate loan, you’ll have the same rate and monthly payment for the loan’s full term.

The main benefit is that you always know what your housing costs are, which takes out the guesswork when planning ahead.

A loan with a fixed interest rate

FHA mortgage

2006-04-18T19:34:00.000-07:00

A loan with certain restrictions that is guaranteed by the Federal Housing Administration

FHA mortgages are easier to qualify for since they require a very low down payment, usually about 3% of the loan amount, and offer low interest rates. The catch is you can only borrow up to a certain amount, and you have to pay both an up-front and monthly premium for insurance.

The insurance safeguards the lender in case you don’t repay the loan. The up-front cost, usually 2-3% of the loan amount, can be lumped onto the loan and paid off over time. To be eligible you must plan to live in the home that you purchase.

Federal National Mortgage Association (Fannie Mae)

2006-04-18T19:32:00.000-07:00

A government-sponsored corporation that buys and sells loans in the secondary market

Fannie Mae buys loans from lenders and sells them to investors, the government and other lenders. This allows lenders to have a steady flow of money so that they can offer more loans to customers who want to buy homes.

Fannie Mae only buys loans that conform to their strict borrowing guidelines. Fannie Mae also offers a special first time buyer program, which only requires a 3% down payment, to encourage people who don’t make a lot of money to buy homes.

Federal Housing Administration (FHA)

2006-04-18T19:31:00.000-07:00

A federal agency that insures loans offered by certain commercial lenders

FHA was created by the Department of Housing and Urban Development (HUD) and offers a variety of financing options to help families qualify for a mortgage. How it works is that FHA insures loans, so if you do not repay (default on), FHA covers the amount owed to the lender.

Fair market value

2006-04-18T19:29:00.000-07:00

The price for a property in a fair and competitive market

The sale price of your home is a true value if it is freely available on the open market. This means that all potential buyers know that a home is up for sale and have an equal opportunity to bid for it. Even if you sell your home for less than you would have liked, this price is still fair and square.

The price of a home sold in court actions, such as a foreclosure or bankruptcy is not the fair market value.

Executor

2006-04-18T19:25:00.000-07:00

A person named in a will to handle the affairs of the person who has died

The executor carries out the terms of the deceased’s will and temporarily takes over all of the deceased’s property until the probate court decides who the legal owner is. A female executor is called an executrix.

Escrow account

2006-04-18T19:23:00.000-07:00

An neutral account that holds a sum of money, usually until a specific transaction is completed

Lenders often set up a type of escrow account, called an impound account, for you to prepay certain recurring costs: your first 6 months of property taxes, your first 2 months of hazard insurance and your first 2 months of mortgage insurance, if required.

You then pay these bills monthly through this account. Some lenders let you waive the account, but may tack on additional points to your closing costs if you choose to not have one.

Escrow

2006-04-18T19:22:00.000-07:00

A way of closing on a home that requires the buyer and seller to transfer fees and documents to a neutral third party

You may complete your home’s purchase/sale in escrow, depending on where the property is located. How escrow works varies, but in general:
(1) the buyer and seller sign anagreement requiring them both to hand over all the closing fees and documents to a neutral third party, called an escrow agent
(2) the escrow agent distributes the money and documents to the proper party, such as the lender or title company
(3) the escrow is considered "closed."

Escrow does not require any meeting between the buyer and seller. Though, if any change needs to be made to how escrow is handled, it must be mutually agreed on.
States that close in escrow: Alaska, Arizona, California, Kansas, Oregon, Montana, Utah, Nevada, Washington, Idaho, New Mexico

Equity

2006-04-18T19:20:00.000-07:00

The difference between a home’s market value and the amount the owner owes on the mortgage

Equity is the amount of money you’d have if you sold your home today and paid off your mortgage – it includes your down payment, all the payments you’ve made against the loan’s principal and any appreciation in your home’s value. As the market value of your home increases, so does your equity.

Similarly, if your home’s value decreases, your equity does too.

One of the main advantages of owning a home is that you can tap into the equity to use for other investments, such as a down payment on another home, college tuition or mutual funds. You bought your home 3 years ago for $110,000 with a $20,000 down payment. Your property's value went up by 3% every year and you've paid off $4,574 of your principal.

If you add the down payment, total appreciation and the amount paid off on your principal, your total equity after 3 years is $34,773.