ARM? GPM? PITI? You’d have to be a cryptologist to figure out some of the terms buyers encounter during the home buying process. Here’s a glossary of home buying terms so that you won’t need a translator.
Adjustable Rate Mortgage (ARM). A loan whose interest rate is adjusted according to movements in the financial market.
Amortization. A payment plan by which a borrower reduces a debt gradually through monthly payments of principal and interest.
Annual Percentage Rate (APR). The annual cost off credit over the life of a loan, including interest, service charges, points, loan fees, mortgage insurance, and other items.
Appraisal. An appraisal is an estimate of the fair market value of your home. Appraisals help both the lender and the buyer to determine if the sales price is consistent with the actual value. An appraiser inspects the house and the neighborhood and makes an estimate based on the price of comparable houses and other factors. The appraisal provides no guarantee that the property is free of defects. Lenders insist on an appraisal to see how much they could recover by selling your house if you default. The fee for this service is usually paid as a cost of your loan and is part of your closing costs.
Appreciation. The increase in the value of a property..
Assumption. A transaction allowing the buyer of a home to assume responsibility for an existing loan on the home instead of getting a new loan. Assumptions are very rare these days.
Balloon. A loan which has a series of monthly payments (often for 5 years or less) with the remaining balance due in a large lump sum payment at the end.
Buydown. An amount paid to reduce the monthly payments on a mortgage loan, usually by “buying down” the interest rate for a certain period of time.
Closing. A meeting to sign documents which transfer property from a seller to a buyer. (Also called settlement.)
Closing Costs. Charges paid at settlement for obtaining a mortgage loan and transferring real estate title.
Conditions, Covenants, and Restrictions (CC and Rs). The standards that define how a property may be used and the protections the developer has made for the benefit of all owners in a subdivision.
Conventional Loan. A mortgage loan not insured by a government agency (such as FHA or VA).
Default. A breach of a mortgage contract (such as not making monthly payments).
Downpayment. The difference between the sales price and the mortgage amount on a home. The downpayment is usually paid at closing.
Due-on-Sale. A clause in a mortgage contract requiring the borrower to pay the entire outstanding balance upon sale or transfer of the property. A mortgage with a due-on-sale clause is not assumable.
Earnest Money. A sum paid to the seller to show that a potential purchaser is serious about buying. At closing, the earnest money is applied to your closing costs. Be sure that you understand the conditions where you do and do not get your earnest money refunded.
Easement. Right-of-way granted to a person or company authorizing access to the owner’s land; for example, a utility company may be granted an easement to install pipes or wires. An owner may voluntarily grant an easement, or in some cases, be compelled to grant one by a local jurisdiction. You will see easements on your survey.
Equity. The difference between the value of a home and what is owed on it.
Escrow. The handling of funds or documents by a third party on behalf of the buyer and/or seller. In Texas, an escrow agent at a title company usually handle the closing process (settlement). Rather than you and the lender meeting to sign all of the documents and transfer money, the title company works with you and the lender separately to ensure that everything is done properly. The title company fees are part of your “closing costs” and are paid at closing.
Escrow Account. Depending on the circumstances of your loan, you may be asked to make monthly payments to an escrow account after you purchase your home. Money in the account may be used to pay taxes, insurance, and any other regular assessments as they fall due. Such accounts serve a similar purpose to withholding income tax from your paycheck; by putting aside money each month, you avoid large annual or semiannual payments.
Federal Housing Administration (FHA). A federal agency which insures mortgages that have lower downpayment requirements than conventional loans.
Fixed Rate Mortgage. A mortgage whose interest rate remains constant over the life of the loan. The payments are not necessarily level. (See Graduated Payment Mortgage and Growing Equity Mortgage).
Graduated Payment Mortgage (GPM). A fixed-rate, fixed-schedule loan which starts with lower payments than a level payment loan; the payments rise annually over the first 5 to 10 years and then remain constant for the remainder of the loan. GPMs involve negative amortization.
Growing Equity Mortgage (Rapid Payoff Mortgage). A fixed-rate, fixed-schedule loan which starts with the same payments as a level payment loan; the payments rise annually, with the entire increase being used to reduce the outstanding balance. No negative amortization occurs, and the increase in payments may enable the borrower to pay off a 30-year loan in 15 to 20 years, or less.
Hazard Insurance. Protection against damage caused by fire, windstorm, or other common hazards. Many lenders require borrowers to carry it in an amount at least equal to the mortgage. Also called “ homeowner’s insurance”.
Level Payment Mortgage. A mortgage whose payments are identical for each month over the life of the loan.
Loan Origination Fee. A lender will charge a fee for the cost of processing the loan, usually calculated as percentage of the loan amount.
Mortgage Broker. A broker who represents numerous lenders and helps consumers find affordable mortgages; the broker charges a fee only if the consumer fins a loan.
Mortgage Commitment. A formal written communication by a lender, agreeing to make a mortgage loan on a specific property, specifying the loan amount, length of time and conditions.
Mortgage Company (Mortgage Banker). A company that borrows money from a bank, lends it to consumers who want to buy homes, then sells the loans to investors.
Mortgagee. The lender who makes a mortgage loan.
Mortgage Loan. A contract in which the borrower’s property is pledged a s collateral and which can be repaid in installments over a long period. The mortgagor (buyer) promises to repay principal and interest, to keep the home insured, to pay all taxes, and to keep the property in good condition.
Mortgage Origination Fee. A charge by a lender for the work involved in preparing and servicing a mortgage application (usually 1 percent of the loan amount).
Negative Amortization. An increase in the outstanding balance of a loan when a monthly payment is not large enough to cover all of the interest due.
Note. A formal document showing the existence of a debt and stating the terms of repayment.
PITI. Principal, interest, taxes, and insurance (the 4 major components of monthly housing payments).
Point. A charge of 1 percent of the mortgage amount. Points are a one-time charge assessed by the lender at closing to increase the interest yield on a mortgage loan.
Prepayment. Payment of all or part of a debt prior to its maturity.
Principal. The amount borrowed in a loan, excluding interest and other charges.
Property Survey. A survey to determine the boundaries of your property. The cost will depend on the complexity of the survey. In most cases your lender will require that you have a survey. In Texas you can use the seller’s existing survey if it is approved by the title company and the lender.
Recording Fee. A charge for recording the transfer of a property, paid to a city, county, or other appropriate branch of government.
Real Estate Settlement ProceduresAct (RESPA). A federal law requiring lenders to provide home buyers with information about known or estimated settlement costs. The act also regulates other aspects of settlement procedures.
R-Value. The resistance of insulation material (including windows) to heat passing through it. The higher the number, the greater the insulating value.
Sales Contract. A contract between a buyer and seller which should explain, in detail, exactly what the purchase includes, what guarantees there are, when the buyer can move in, what the closing costs are, and what recourse the parties have if the contract is not fulfilled or if the buyer cannot get a mortgage commitment at the agreed-upon terms.
Settlement. (See Closing).
Tenancy in Common. A form of ownership in which the tenants own separate but equal parts. To inherit the property, a surviving tenant would either have to be mentioned in the will or, in the absence of a will, be eligible through state inheritance laws. In Texas, a community property state, married persons own the property as “tenants in common”.
Title. Evidence (usually in the form of a certificate or deed) of a person’s legal right to ownership of a property.
Veterans Administration (VA). A federal agency which insures mortgage loans with very liberal downpayment requirements for honorably discharged veterans and their surviving spouses.
Walk-Through. A final inspection of a home before settlement to search for problems that need to be corrected before ownership changes hands.
Warranty. A promise, either written or implied, that the material and workmanship of a product is defect-free or will meet a specified level of performance over a specified period of time. Written warranties on new homes are either backed by insurance companies or by the builders themselves.
Zoning. Regulations established by local governments regarding the location, height, and use for any given piece of property within a specific area.