Glossary of Finance & Mortgage Terms

[Brian Gibbons]

Glossary of Mortgage, Finance and RE Tax Terms

Amortize
To reduce a debt by regular payments of both principal and interest.

Appraised Value
The value of a property at a given time, based on facts regarding the location, improvements, etc., of the property and surroundings.

ARM
An adjustable rate mortgage, that is, a loan whose interest rate may adjust over time depending on certain factors or a pre-determined formula.

Arrears
Payment made after its due is in arrears. Interest is said to be paid in arrears since it is paid to the date of payment rather than in advance.

Assumable Loan
A loan secured by a mortgage or deed of trust containing no "due-on-sale" provision. Most pre-1989 FHA loansand pre-1988 VA loans are assumable without qualification. Some newer loans may be assumed with the express permission of the note holder.

Assumption of Mortgage
Agreement by a buyer to assume the liability under an existing note secured by a mortgage or deed of trust.

Balloon Mortgage
A note calling for periodic payments which are insufficient to fully amortize the face amount of the note prior to maturity, so that a principal sum known as a "Balloon" is due at maturity.

Basis
The financial interest one has in a property for tax purposes. Basis is adjusted down by depreciation and up by capital improvements.

Binder
A report issued by a title insurance company setting forth the condition of title and setting forth conditions, which, if satisfied, will cause a policy of title insurance to be issued. Also known as a "title commitment."

Capital Gain
Profit from the sale of a "capital" asset, such as real property. A long-term capital gain is a gain derived from property held more than 12 months. Long-term gains can be taxed at lower rates than short-term gains.

Closing Cost
Expenses incurred in the closing of a real estate or mortgage transaction. Most fees are associated with the buyer or borrower's loan.

Conventional Mortgage
A loan neither insured by the FHA nor guaranteed by the VA.

Depreciation
Decrease in value to real property improvements caused by deterioration or obsolescence.
Documentary Tax Stamps
Stamps, affixed to a deed, showing the amount of transfer tax. Some states simply charge the transfer tax without affixing stamps. Also known as "doc stamps."

Equity
The difference between the market value of the property and the homeowners mortgage debt.

Federal Housing Administration (FHA)
A federal Agency which insures first mortgages, enabling lenders to loan a very high percentage of the sale price.

Freddie Mac (FHLMC)
Federal Home Loan Mortgage Corporation. A federal Agency purchasing first mortgages, both conventional and federally insured, from members of the Federal Reserve System, and the Federal Home Loan Bank System.

Ginnie Mac (GNMA)
Government National Mortgage Association. A federal association working with FHA which offers special assistance in obtaining mortgages, and purchases mortgages in a secondary capacity.

Good Faith Estimate
A lender's estimate of closing costs and monthly payment required by R.E.S.P.A.

Impound Account
Account held by a lender for payment of taxes, insurance, or other payments. Also known as an "escrow" account.

Index
The measure of interest rate changes that the lender uses to decide how the interest rate on an ARM (adjustable rate mortgage) will change over time.

Insured Mortgage
A mortgage insured against loss to the mortgagee in the event of default and failure of the mortgaged property to satisfy the balance owing plus costs of foreclosure.

Interest Rate
The percentage of an amount of money which is paid for its use for a specified time.

Loan-to-Value Ratio
The ratio of the mortgage loan amount to the properties appraised value (or the selling price whichever is less).

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[Brian Gibbons]

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Mechanics Lien
A lien created by state law for the purpose of securing priority of payment for the price of value of work performed and materials furnished in construction of repair of improvements to land, and which attached to the land as well as the improvements.

Mortgage Broker
One who for a fee, brings together a borrower and lender, and handles the necessary applications for the borrower to obtain a loan against real property by giving a mortgage or deed of trust as security.

Mortgage Guaranty Insurance Corporation (MGIC)
A private corporation which, for a fee, insures mortgage loans similar to FHA and VA insurance, although not insuring as great a percentage of the loan.

Mortgage
A security instrument given by a borrower to secure performance of payment under a note. The document is recorded in county land records, creating a lien (encumbrance) on the property. Also known as a "deed of trust" in some state. The borrower is also called a "mortgagor."

Mortgage Insurance
Insurance required for loans with a loan-to-value ratio above 80%. Also called "PMI," "MIP."

Note
A written promise to repay a certain sum of money on specified terms. Also known as a "promissory note."

Originination Fee
A fee or charge for work involved in the evaluation, preparation and submission of a proposed mortgage loan. Usually about 1% of the loan amount.

Points
Fee paid by a borrower to obtain a loan. A point is one percent of the principal amount of the loan. The borrower may usually pay more points to reduce the interest rate of the loan.

Prorate
To divide in proportionate shares. Used in the context of a closing, at which such as propery taxes, interest, rents and other items are adjusted in favor of the seller, buyer or lender.

Purchase Money Mortgage
A loan obtained in conjunction with the purchase of real estate.

Recourse Note
A note under which the holder can look personally to the borrower for payment.

Redemption
The right, in some states, for an owner of lien holder to satisfy the indebtedness due on a mortgage in foreclosure after sale.

Refinancing
The repayment of a loan from the proceeds of a new loan using the same property as collateral.

Release
An instrument releasing a lien or or encumbrance (e.g., mortgage) from a property.

RESPA (Real Estate Settlement Procedures Act)
A federal law requiring disclosure of certain costs in the sale of residential property which is to be financed by a federally insured lender. Also requires that the lender provide a "good faith estimate" of closing costs prior to closing of the loan.

Second Mortgage
A loan secured by a mortgage or trust deed, which lien is junior to a first mortgage or deed of trust.

Secondary Mortgage Market
The buying and selling of first mortgages and deeds of trust deeds by banks, insurance companies, government agencies, and other mortgagees.

Security Instrument
A document under which collateral is pledged (e.g. mortgage)

Settlement Statement
A statement prepared by a closing agent (usually a title or escrow company) giving a complete breakdown of costs and charges involved in a real estate transaction. Required by RESPA on a form HUD-1.

Specific Performance
An action to compel the performance of a contract.

Sublet
To let part of one's estate in a lease. A subtenant is not in privity of contract with the landlord and neither can look to each each for performance of a lease agreement.

Subject-To
When transferring title to a property encumbered by a mortgage lien without paying off the debt or assuming the note, the buyer is taking title "subject to."

Subordination
The process by which a lien holder agrees to permit his lien to become junior or "subordinate" to another lien.

Tenancy in Common
With tenancy in common, each owner (called a "tenant") has an undivided interest in the possession of the property. Each tenant’s interest is salable and transferable. Each tenant can convey his interest by deed, mortgage or by a will. Joint ownership is presumed tenants in common if nothing further is stated on the deed.

Tenancy by the Entirety
A form of ownership recognized in some states by which husband and wife each owns the entire property. As with joint tenancy, in event of death of one, the survivor owns the property without probate. In some states, tenancy by entirety protects the property from obligations of one spouse.

Title
Title is the evidence of ownership. In essence, title is more important than ownership because having proper title is proof of ownership. If you have a problem with your title, you will have trouble proving your ownership and thus selling or mortgaging your property.

Title Insurance
An insurance policy which protects the insured (purchaser and/or lender) against loss arising from defects in title. A policy protecting the lender is called a "Loan Policy," whereas a policy protecting the purchaser is called a "Owner's Policy." Virtually all transactions involving a loan require title insurance.

Truth in Lending
Federal law requiring, among other things, a disclosure of interest rates charges and other information about a loan.

Yield Spread Premium
A "kickback" from the lender to the mortgage broker for the additional profit made from marking up the interest rate on a loan.