ADJUSTABLE RATE MORTGAGE (ARM): A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also known as a variable rate mortgage.

APPRAISAL: An estimate or opinion of the value of property, made by a qualified professional called an “appraiser”.

ASSUMPTION: The act of acquiring title to property which has an existing mortgage, and agreeing to be personally liable for the terms and conditions of the mortgage including the payments. Assuming a loan can usually save the buyers money since this is an existing mortgage debt, unlike a new mortgage which closing costs and possibly higher market interest rate charges will apply.

CLOSING: The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.

CLOSING COSTS: Usually includes an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. Normally, the costs of closing will be 3 percent to 6 percent of the mortgage loan.

CONVENTIONAL LOAN: A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration (FHA).

CREDIT REPORT: A report documenting the credit history and current status of a borrower’s credit standing.

DEED OF TRUST: In many states, this document is used in place of a mortgage to secure the payment of a note.

DISCOUNT POINTS: See points.

EARNEST MONEY: Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

EQUITY: The difference between the fair market value and current indebtedness also referred to as the owner’s interest.

ESCROW: Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all of the paperwork of settlement or “closing”. Escrow may also refer to an account held by the lender into which the home buyer pays money for tax and insurance payments.

FHA LOAN: A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.

FHA MORTGAGE INSURANCE: Insurance, paid by the borrower that protects the lender against loss if the borrower should default on the mortgage payments and foreclosure should become necessary. this insurance is required on all FHA loans.

RESPA: Short for Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs after application and again prior to or at settlement. The law requires this information to be furnished after application only.

SURVEY: A map of description of land, showing the precise location of any improvements on the site, as well as the location of easements, rights-of-way or encroachments.

TITLE: A document evidencing an individual’s right to/or ownership in property.

TITLE INSURANCE: A policy, usually issued by a title insurance company, by which the insuring company agrees to indemnify and protect the insured against loss arising from defects, (i.e., forged documents, incorrect legal interpretations, misfiled instruments, etc.). The insuring company also agrees to defend the insured in court against any lawsuits that may arise from these defects.

VA LOAN: A long-term low of no-down payment loan guaranteed by the Veteran’s Administration. Restricted to individuals qualified by military service or other entitlements.

VA FUNDING FEE: A fee charged by the VA to defray administrative costs. The fee is currently one percent of the loan amount and is required on all VA loans.

GOOD FAITH ESTIMATE: A written estimate of all loan charges made by a lender to a proposed borrower. This estimate is a requirement of RESPA and must be provided to a borrower within three days of receipt of application.

HAZARD INSURANCE: A contract whereby an insurer, for a premium, agrees to compensate the insured for loss of a specific property due to certain hazards, (i.e., fire, windstorm, etc.)

HUD: DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT: A department of the Federal government under whose auspices the FHA is operated. The department provides control over government programs designed to provide housing and the improvement of housing standards.

MARKET VALUE: The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

MORTGAGE: A formal document executed by an owner or property, pledging that property as
security for payment of a debt.

MORTGAGOR: The borrower or homeowner.

MORTGAGEE: The lender.

NOTE: The instrument signed by the borrower promising to pay the debt and secured by the Deed of Trust.

ORIGINATION FEE: The fee charged by a lender to prepare loan documents, usually computed as a percentage of the face value of the loan.

PITI: Principal, interest, taxes and insurance. Also called monthly housing expense.

POINTS (LOAN DISCOUNT POINTS): Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount. (e.g., two points on a $100,000 mortgage would cost $2,000.).

PREPAIDS: Expenses necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

PRIVATE MORTGAGE INSURANCE (PMI): Insurance written by a private mortgage insurer, (rather than FHA) which protects against loss caused by a borrower’s default. Normally required when the down payment transaction is less than 20%.

RECORDING FEES: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. (i.e., warranty deed, trust deed).