Finance Terms

Amortization
The gradual reduction of debt by means of periodic payments sufficient to pay principal and interest and thereby liquidate the debt.

ARM
Adjustable Rate Mortgage. A loan where the interest rate can change according to the index, caps, and margin.

Appraisal
An unbiased, professional estimate of a property's value based on style, appearance, quality of construction, improvements, usefulness, and the comparable value of nearby properties.

Balloon Mortgage
A short term loan, usually 5 to 7 years, that features a fixed interest rate, and a final large balloon payment for balance of the mortgage.

Borrower
A person who receives funds in the form of a loan with the obligation of repaying the loan in full with interest, if applicable.

Broker
One who, for a commission or fee, brings parties together and assists in negotiating contracts between them. In real estate transactions, the broker usually brings together the buyer and the seller.

Caps
The maximum or minimum amount by which the interest rate on an adjustable rate mortgage can change over each adjustment and over its life. For example a 2/6 cap means that the ARM cannot adjust more than 2% up or down each adjustment, or 6% from the start rate during its life.

Chattel
Personal property.

Closing
The final settlement of the transfer of property. Involves the buyer's signing the mortgage note and an exchange of title.

Closing Agent
Assures that all documentation related to the sale of a house has been completed properly, including the title search and title insurance. The closing agent explains all closing documents to the buyer and the seller, obtains their signatures where necessary, and records the documents.

Closing Costs
Fees and other charges paid by the buyer and seller at closing.

Closing Statement
A financial disclosure giving an account of all funds received and expected at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

Co-Borrower
The person who is sharing the mortgage responsibility with the borrower.

Contingency
A clause within an Offer to Purchase or within the Contract For Sale that requires a certain condition be met before proceeding to closing.

Contract
An agreement between two or more parties to do or not to do a particular thing.
Contract for Sale

AKA: Conditional Sales Contract - A sales contract whereby the borrower has possession of the property, but seller retains ownership of the property until the buyer has fulfilled the obligations put forth in the contract.

Conventional Mortgage
A Mortgage not insured by the government, such as FHA or VA.

Counter Offer
The offer made by one party (buyer or seller) in response to an offer presented by the other.

Credit Report
A report to a prospective lender on the credit standing of a prospective borrower, used to help determine credit worthiness.

Debt-To-Income Ratio
Long-term debt expense as a percentage of monthly income.

Deed
The instrument that transfers title from the seller to the buyer.

Down Payment
The buyer's payment to the seller at closing for a percentage of the purchase price required by the buyer's mortgage loan.

Earnest Money
Money paid by the buyer to the seller at the time the Offer to Purchase is presented. Generally, earnest money is applied to the purchase price.

Equity
The home owner's interest in a property. It is different between fair market value and the current amount the owner owes on the property.

Fair Market Value
The price at which a property is transferred between a willing buyer and a willing seller, each of whom has a reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

FHA
Federal Housing Administration - A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lender.

FHLMC
Federal Home Loan Mortgage Corporation - A private corporation created by Congress to support the secondary mortgage market. It sells participation certificates secured by pools of conventional mortgage loans, their principal and interest guaranteed by the federal government through FHLMC. Popularly known as Freddie Mac.

First Mortgage
A mortgage that is a first lien on the property pledged as security.

FNMA
Federal National Mortgage Association - A private corporation created by Congress to support the secondary mortgage market. FNMA sells mortgage - backed securities backed by pools of conventional loans. Payment of principal and interest on these securities is backed by the US Government. Popularly known as Fannie Mae.

Gross Monthly Income
The amount of consistent and stable income that an individual receives each month. averaged over a period of time. This amount includes overtime pay, bonuses, commissions, and income from dividends and interest, provided that the individual can show a consistent history of receiving such income.

Hazard Insurance
A contract whereby, for an agreed premium, one party undertakes to compensate the other for loss on a specific subject by specified hazards, such as acts of God or war.

Homeowners Association
An organization of homeowners residing within a particular development whose major purpose is to maintain and provide community facilities and services for the common enjoyment of the residents.

Housing Expense Ratio
A home owner's percentage of their monthly income.

Index
A published financial benchmark used to help determine the interest rate for an adjustable rate mortgage on its adjustment. The margin is added to it.

Interest
Money paid for the use of money - that is, money paid for a loan.

Loan-To-Value Ratio
The relationship between the amount of a home loan and the total value of the property. For example if you receive a loan of $95,000 on ah home that costs $100,000, the loan-to-value ratio is 95%.

Margin
The amount added to the index to help determine the new interest rate of an adjustable rate mortgage.

Mortgage Insurance
A policy that allows mortgage lenders to recover part of their financial losses if a borrower fails to fully re-pay a loan. Mortgage insurance makes it possible to buy a home with as little as 5% down.

Offer To Purchase
A legally-binding, written contract that declares how much a buyer will pay for a house, provided certain condition are met.

Origination Fee
Similar to a point, it is a fee paid to lenders for originating the mortgage.

PITI
Principle, Interest, Taxes, and Insurance - the four main parts of a monthly mortgage payment.

Planned Unit Development -(PUD)
A subdivision having lots or areas owned in common and reserved for the use of some or all of the owners of the separately owned lots.

Discount Points
One point equals one percent of the total mortgage amount. This is a fee paid to lenders to get lower rate on the mortgage.

Pre-Approval
Having the loan processed, underwritten, and obtaining loan approval before an Offer to Purchase has been accepted by a seller.

Pre-Qualify
Preliminary indications on how large a mortgage a buyer can quality for.

Qualify
Ability to meet a lender's mortgage approval requirements.

Servicer
After a mortgage loan closes, the loan servicer collects the payments, manages escrow accounts, pays taxes and insurance, and manages delinquent payments. Lenders may often sell or "release" servicing to another business, which means that a home buyer will not necessarily send house payments to the original lender.

Title
The right of ownership and possession of a property.

Title Insurance
A policy that protects a buyer against errors or omissions or defects in the title of the property.

Veterans Administration (VA)
An independent agency of the federal government created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss