Buying a home can often make a person feel like they are in a foreign country where people are speaking a language unknown to them. The process can be scary enough, especially for the first time homebuyer, without adding language barriers to the equation. So, in an effort to bridge the communication gap, here are a few terms to get familiar with if you are considering buying or selling your home.
- Adjustable rate: An interest rate that may change over the life of the loan, and the essence of an Adjustable Rate Mortgage or ARM. Some rates vary according to an established financial index such as the Cost of Funds Index, typically adding a set a margin of percentage points.
- Appraisal: A report expressing the estimated value of a property based on a comparison of similar saleable properties. Also, the act of appraising a property.
- Assumable mortgage: A loan that can be transferred with a sold property to a new buyer.
- Balloon payment: A final lump sum payment, typically larger than previous payments, due at the end of a balloon-type loan.
- Collateral: Property pledged as security for a debt, such as real estate that secures a mortgage. Collateral can be repossessed if the loan is not repaid.
- Conventional loan: A mortgage loan not insured or guaranteed by a federal government entity such as the Federal Housing Administration.
- Deed: A document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description.
- Deed of trust: Used in some states, it serves the same purpose as a mortgage. It conveys title to a real estate property to a disinterested third (a trustee), who holds the title until the owner of the property has repaid the debt.
- Escrow: A third-party financial instrument to hold funds on behalf of the other two parties in a transaction. In a real estate transaction, if there are conditions to the sale such as passing an inspection, the buyer and seller may agree to use an escrow account. Once the conditions are met, the escrow transfers the payment to the seller and title is transferred to the buyer.
- Fixed-rate mortgage: A mortgage with payments that remain the same throughout the life of the loan. The interest rate is fixed (unlike an adjustable rate).
- Good faith: Refers to settlement charges paid by a by the borrower at closing. A Good Faith Estimate of the charges is required by The Real Estate Settlement Procedures Act.
- HELOC: Home Equity Line of Credit. This is usually a second mortgage allowing the borrower to obtain cash against the equity of a home up to a predetermined amount.
- HUD: The U.S. Department of Housing and Urban Development, created to address public housing needs, improve and develop American communities, and enforce fair housing laws.
- HUD-1: Also known as the “settlement sheet,” it itemizes all closing costs such as real estate commissions, loan fees, points, and escrow amounts.
- Interest-only mortgage: A mortgage in which, for a period of time, the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.
- Jumbo loan: Also called a non-conforming loan, it is a loan above a certain dollar amount. In 2009, the amount for single-family homes in most states was $417,000. Above that limit, the loan is ineligible to be purchased by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).
- Lien: A legal claim against a property that must be paid off when the property is sold. A lien is created when you borrow money and use your home as collateral for the loan.
- Loan-to-value ratio: Expressed as a percentage, the amount of the loan divided by the value of a property. For example, if you have a $120,000 mortgage against a $200,000 home, the LTV is 60 percent.
- Mortgage: The instrument used to pledge title to a property as security for repayment of a debt.
- Owner-occupied: Used to describe a home occupied by a borrower or a member of the immediate family as a primary residence as opposed to a rental property. The distinction significantly affects mortgage rates.
- PITI: Principal, Interest, Taxes, and Insurance — the four elements of a monthly mortgage payment.
- Points: Mortgage industry synonym for one percent, typically of the principal loan amount. To pay an origination fee of two points on a $100,000 loan, for example, you pay $2,000 to the lender.
- Quitclaim deed: An instrument transferring ownership of a property, typically with no guarantee of an unencumbered clear title.
- Realtor: A real estate broker or agent with an active membership in the National Association of Realtors. Not all brokers or agents are Realtors.
- Reverse mortgage: An instrument used by senior homeowners age 62 and older to convert the equity in their home into a monthly stream of income.
- Survey: A measurement description of land prepared by a registered land surveyor. Typically it shows the property dimensions and its location relative to known landmarks, plus the location and dimensions of any improvements.
- Title: The evidence to the right to, or ownership of, property.
- Title insurance: A policy that guarantees the accuracy of a title search and protects against errors. Most lenders require the buyer to purchase title insurance to protect the lender against loss in the event of a title defect. This charge is included in the closing costs.
- Underwriting: The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.
- VA loan: A loan guaranteed by the U.S. Department of Veterans Affairs as a benefit to military veterans.
- Warranty Deed: A legal document which guarantees that the seller is the true owner of the property and has the right to sell the property.
- Yield curve: A graph that compares long-term lending rates to short-term rates. Lenders borrow short at lower rates to lend long at higher rates. A steep curve spells bigger profits for lenders.
- Zero-down mortgage: A loan that finances 100 percent of the purchase price.
I hope this helps clarify the mumbo jumbo of buying and selling a home. Please let us know if we can assist you with any of your real estate needs.
Until Next Time...
Dick and the Maximum Exposure Team