Glossary for Home Buyers

When shopping for a new home, you’ll hear a variety of terms and words that just might be unfamiliar to you.

The following glossary will help you in your home search.

Adjustable Rate Mortgage — A loan whose interest rate is adjusted according to movements in the financial market.

Amortization — A payment plan in which a loan is reduced through monthly payments of principal and interest.

Annual Percentage Rate (APR) — The annual cost over the life of a loan include interest and other items.

Appraisal — An evaluation to determine what a piece of property would sell for in the current marketplace.

Assessment — A tax levied on a property or a value placed on the worth of a property by a taxing authority.

Assumption — A transaction allowing the buyer to assume responsibility for an existing loan instead of getting a new loan.

Balloon — A loan that has a series of monthly payments with the remaining balance due in a large lump sum payment at the end.

Binder — A receipt for a deposit paid to secure the right to purchase a home at terms agreed upon by the buyer and seller.

Buydown — A subsidy (usually paid by the builder or developer) to reduce the monthly payments on a mortgage loan.

Cap — A limit to the amount an interest rate or a monthly payment can increase for an adjustable rate loan either during an adjustment period or over the life of the loan.

Certificate of Occupancy — A document from an official agency stating that the property meets the requirements of local codes, ordinances and regulations.

Closing Costs — Charges paid at settlement for obtaining a mortgage loan and transferring a real estate title.

Conditions, Covenants and Restrictions (CCs and Rs) — The standards that define how a property may be used and the protections the developer makes for the benefit of all owners in a subdivision.

Conventional loan — The ability to change a loan from an adjustable rate schedule to a fixed rate schedule.

Credit rating — A report ordered by a lender from a credit bureau to determine if the borrower is a good credit risk.

Default — Breach of mortgage contract (not making the required payments.)

Density — The number of homes built on a particular acre of land. Allowable densities are determined by local jurisdiction.

Downpayment — The difference between the sales price and the mortgage amount. A downpayment is usually paid at closing.

Due-On-Sale — A clause in the mortgage contract requiring the borrower to pay the entire outstanding balance upon sale or transfer of the property.

Earnest money — A sum paid to the seller to show that a potential purchaser is serious about buying.

Easement — The 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 can be ordered to grant one by a local jurisdiction.

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 or a seller.

Federal Housing Administration — A federal government agency that insures mortgages with lower downpayment requirements than conventional loans.

Fixed Schedule Mortgage — A mortgage with a payment schedule that is established at closing for the life of the loan. The payment and interest rates are not necessarily level.

Graduated Payment Mortgage (GPM) — A fixed rate, fixed schedule loan that starts with lower payments than a level payment loan.

The payments increase annually over the first five to 10 years and then stay constant for the remainder of the loan. GPMs involve constant amortization.

Growing Equity Mortgage (Rapid Payoff Mortgage) — A fixed-rate, fixed schedule loan that 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 insurance in an amount at least equal to the mortgage.

Housing Finance Agency — A state agency that offers below market rate home financing for low and moderate income households.

Index — The interest rate or adjustment standard that determines the changes in monthly payments for an adjustable rate loan.

Infrastructure — The public facilities and services needed to support residential development, including highways, bridges, schools and sewer and water systems.

Interest — The cost paid to a lender for borrowed money.

Joint Tenancy — A form of ownership in which tenants own a property equally. If one dies, the other automatically inherits the entire property.

Level Payment Mortgage — A mortgage with identical monthly payments over the life of a loan.

Mortgage Broker — A broker who represents numerous lenders and helps consumers find affordable mortgages. The broker charges a fee only if the consumer finds 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 — A company that borrows money from a bank, lends it to consumers to buy homes and then sells the loan to investors.

Mortgagee — The lender who makes a mortgage loan.

Mortgage Loan — A contract in which the borrower’s property is pledged as collateral. It is repaid in installments. The mortgagor (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.

The fee is usually one percent of the loan amount.

Negative amortization — An increase in the outstanding amount when a monthly payment does not cover the monthly 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 four major components of monthly housing payments.

Point — A one time charge assessed by the lender at closing to increase the interest yield on a mortgage loan.

Generally it is one percent of the mortgage amount.

Prepayment — Payment of a debt prior to maturity.

Principal — The amount borrowed, excluding interest and other charges.

Property survey — A survey to determine the boundaries of your property. Cost depends on the complexity of the survey.

Recording fee — A charge for recording the transfer of property, paid to a city, county or other appropriate branch of government.

Real Estate Settlement Procedures Act — A federal law requiring lenders to provide home buyers with information about known or estimated settlement costs.

R-Value — The resistance of insulation materials (including windows) to heat passing through it. The higher the number the greater the insulating value.

Sales Contract — A contract between buyer and seller that should explain, in detail, exactly what the purchase includes, what guarantees there are, when the buyer can move in, what closing costs are and what recourse the parties have if the contract is not fulfilled or the buyer cannot get a mortgage commitment at the agreed upon terms.

Shared Appreciation Mortgage — A loan in which partners agree to share specified portions of the downpayment, monthly payment and appreciation.

Tenancy in Common — a form of ownership where 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.

Title — Evidence, usually in the form of a certificate or deed, of a person’s legal right to a property.

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

Veteran’s Administration (VA) — A federal agency that 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 workman ship 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 the builders.