Glossary of Real Estate Terms

A

Adjustable-rate mortgage
A loan with an interest rate adjusted periodically, typically at one-year intervals. One-year ARMs adjust every year, but three-, five- and seven-year ARMs don't adjust until those periods are up, and typically every year after that. The adjustments depend on movements of any number of financial market indexes, including the prime rate.

Amortization
Most loans are amortized over 15 or 30 years. An amortization plan reduces a loan, eventually to zero, through monthly payments of principal and interest.

Annual percentage rate
The annual cost of a mortgage, including interest, service charges, points, loan fees, mortgage insurance and other fees. The APR is higher than the stated interest rate on a mortgage because it takes the points, fees, etc., into account.

Appraisal
An evaluation, usually made by an outside expert, to determine what a piece of property would sell for in the current marketplace.

Appreciation
The increase in the value of a home.

Assessment
The value placed on a property used to determine property taxes due.

B

Balloon mortgage
A mortgage where the remaining balance due to the lender must be paid all at once, usually five, seven or 10 years down the line, at which time the homeowner can refinance.

Buydown
A subsidy, usually paid by a builder, to reduce monthly mortgage payments.

C

Cap
A limit to the amount the interest rate or the monthly payment of an ARM can increase, either during an adjustment period or over the life of the loan.

Closing
A meeting to sign documents that transfer property from a seller to a buyer (also referred to as settlement).

Closing costs
Charges paid at settlement for obtaining a mortgage and transferring a real-estate title. It can run to a couple of thousand dollars that pays recording and title fees, a survey, points, transfer taxes and other costs.

Conventional loan
A mortgage loan not insured by a government or quasi-government agency such as the Federal Housing Authority or the Veterans Administration.

Convertibility
The ability to change a loan from an adjustable-rate schedule to a fixed-rate schedule at some point in the future.

Credit report
A report issued by a credit bureau to a lender that shows if a borrower is a good credit risk.

D

Default
Failing to make your mortgage payments at all or on time.

Down payment
The part of a home's cost a buyer must pay out of pocket. A down payment is usually paid at closing.

Earnest money
Money paid to the seller or the seller's real-estate broker to show that a buyer is serious about buying. Usually a few thousand dollars.

E

Equity
The difference between the market value of a home and what is owed to the mortgage company.

Escrow account
1) An account set up during the purchase process to hold earnest money or other funds.
2) An account set up by the mortgage company to hold the borrower's money that's set aside to pay property taxes, hazard insurance or mortgage insurance.

F

Federal Housing Administration
A federal agency that insures mortgages with lower down-payment requirements than conventional loans.

Fixed-rate mortgage
A mortgage with an interest rate that remains constant over the life of the loan.

H

Hazard insurance
Protection against damage caused by common hazards. Many lenders require borrowers to carry an insurance amount at least equal to the mortgage.

I

Interest
The cost paid to a lender for borrowed money.

M

Mortgage broker
Brokers help buyers find a mortgage with one of several lenders they represent.

Mortgage commitment
A letter from a lender agreeing to make a mortgage for a specific property, specifying the loan amount, length of time and other conditions.

Mortgage loan
A contract in which the borrower's property is pledged as collateral. The loan is repaid in installments. The buyer promises to repay principal and interest, keep the home insured, pay all taxes and keep the property in good condition.

Mortgage origination fee
A charge for the work involved in preparing and servicing a mortgage application (usually 1 percent of the loan amount).

P

PITI
The four major components of a monthly home payment: principal, interest, taxes and (hazard) insurance.

Point
A one-time charge assessed by the lender at closing to increase profits from a mortgage. When charged, points range from 1 to 3 points, or 1 percent to 3 percent of the loan amount.

Principal
The amount borrowed, excluding interest and other charges.

Property survey
A survey to determine the boundaries of a property. The cost depends on the complexity of the survey.

R

Recording fee
A charge for recording the transfer of a property paid to the county.

S

Sales contract
A contract between a buyer and seller that explains in detail exactly what the purchase includes, what guarantees there are, when the buyer can move in, and what recourse the parties have if the contract is not fulfilled or if the buyer cannot get a mortgage commitment.

T

Title
Evidence (usually in the form of a certificate or deed) of a person's legal right to own a property.

Transfer taxes
Taxes levied on the transfer of property or on real estate loans by state and/or local governments.

V

Veterans Administration
A federal agency that insures mortgage loans with very liberal down-payment requirements for honorably discharged veterans and their surviving spouses.

W

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 material and workmanship are defect-free. Written warranties on new homes are either backed by insurance companies or by the builders themselves.

Z

Zoning
Regulations established by local governments regarding the location, height and use for any given piece of property within a specific area.