Glossary of Terms

Adjustable Rate Mortgage: A loan that adjusts on a regular schedule based on a national economic index and the lender's margin.

Amortization: The process of paying off a loan with payments over a fixed time period.

Annual Percentage Rate (APR): The total rate you are paying, which includes the monthly interest, the points, and other fees charged by the lender.

Appraisal: A professional opinion of the market value of a property.

Bankruptcy: A legal proceeding declaring that an individual is unable to pay debts.

Buy-Downs: Points a borrower pays in advance to lower the interest rate.

Buyer's Agent: A real estate professional that enters into a contract of agency relationship with the buyer, and typically gets paid by splitting the sales commission with the selling or listing agent.

Cash-out Refinance: When an owner refinances a loan and takes some equity out as cash.

Cash Reserves: A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first of several mortgage payments.

Charge Off: An accounting term used to indicate that the creditor does not expect to collect the balance owed on an account.

Closing Costs: Expenses (over and above the purchase price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs".

Commitment Letter: A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer.

Escrow: The time period between the signing of the purchase contract and the loan closing.

Escrow Account: A special account set up by the lender to collect and hold monthly payments toward annual property taxes and homeowner's insurance.

Fixed-Rate Mortgage: A loan where the interest rate remains the same over the life of the loan.

FHA: Federal Housing Administration, a federal government form of mortgage insurance.

Flood Insurance: A policy required by a lender if a buyer's house is located in a flood zone.

Good Faith Estimate: A document that discloses all of your settlement costs.

Gross Income: Money earned before taxes are withdrawn.

Home Equity Loan: A loan based on the difference of the amount of equity paid on a home and the home's current market value.

Homeowner's Insurance: An insurance policy that combines liability coverage and hazard insurance.

PITI: Principal, interest, taxes and insurance, or the total mortgage loan payment.

Point: One percent (1%) of the loan amount.

Preapproval: A guarantee that a lender will loan a potential buyer a fixed amount if s/he buys a home within a certain time frame and the home appraises for the amount of money for which s/he qualifies.

Prepayment: Paying more each month than the amount of your mortgage payments in order to pay off the loan sooner and save money on interest.

Prequalification: The process used by lenders to calculate a potential buyer's mortgage affordability, usually based on unverified information.

Principal: The outstanding balance of a loan, not including interest.

Promissory Note: A document in which the borrower promises to repay a loan.

RESPA: The Real Estate Settlement Procedures Act, which establishes laws and procedures for closing mortgage loans.

Survey: A professional measurement of a property and the land around it.

Tenancy in Common: A form of ownership where two or more people own a property and can have different shares of ownership.