Financial Glossary

Depreciation in which deduction start at their highest annual value in the year and steadily diminish in later years.

Adjustable Rate Mortgage (ARM)

A mortgage in which in interest rate is adjusted periodically according to a pre-selected index. The terms, adjustments schedule, and index to be used can be negotiated by the borrower and lender. These changes, up or down, are linked to the changes in the financial index, such as treasury bills. Some ARMs have a cap on the interest rate increases.

Amortization

The process by which a loan is repaid over time. Most loan program provide for full repayment of the borrowed amount over the term of the loan. These loan are known as "fully amortizing." For example, making the payment for 30 years on a 30 year fixed rate loan will pay off the loan in 30 years.

Appraisal

An estimate of the market value of your property. It is usually conducted by a professional who is not an employee of the lender. The term also refers to the process by which this estimate is obtained. Real estate, tax and insurance appraisals may differ widely.

APR

"Annualized Percentage Rate" as defined by the Federal Government is the 'effective' cost of borrowing money which takes into account certain costs of borrowing such as prepaid interest, points, escrow fees, and private mortgage insurance.

Assessed Value

The value of public tax assessor assigns to the property as a basis of levying property taxes.

Balloon Mortgage

A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date in the future, usually at the end of the term.

Balloon Note

A form of promissory note that calls for the minimum payment of principal and the payment of interest at regular intervals. This type of note requires a substantial final payment, which represents all the principal.

BUY DOWN

Paying a lump sum up front to reduce the interest rate on a mortgage.

Cap

The maximum amount of interest rate or monthly payment can change, at established intervals and/or over the life of the mortgage.

Credit Check

A lender-initiated study to determine creditworthiness based on a borrower's credit history.

Closing Costs

Real estate transactions will have charges for escrow services, title insurance, appraisals, credit reports, brokerage commissions, inspections, attorney's fees, and etc., which are cost of the transactions and paid as part of the closing process. These fees are usually paid by the buyers and seller according the sales contract.

Combined Gross Annual Income

Your pre-tax earnings, or the pre-tax amount earned by you and your spouse if you are married.

Conforming Loans

Generally, those loan amounts which conform to FNMA/FHLMC loan limits. Also means those loan programs which 'conform' to income, credit, property and loan amount guidelines for the above agencies.

Conventional Loan

Residential real estate loan not insured or guaranteed by the Federal Government. A loan secured by a mortgage or deed of trust for which the loan-to-value ratio is within a acceptable range for a particular lending institution. Often considered conforming - FNMA, FHLMC.

Deed

A legal document conveying title to a property.

Down Payment

Amount of money the borrower intends to pay towards the purchase price of the home and not counting closing costs involved in the transaction including title, escrow, appraisal, etc. The down payment is often expressed in percentage terms, e.g. "20% down payment."

Earnest Money

A portion of the down payment, deposited on behalf of the seller by a potential buyer. Earnest money indicates the buyer's intent to complete the purchase of the property. May or may not be required by state law.

Escrow

In a purchase transaction, this is the third party company which facilitates the transfer of title from seller to the buyer and the transfer of purchase funds from the buyer to the seller. In a refinance transaction

Escrow Account

Also known as an "impound account", this is an account in which the lender holds the borrower's monthly payments for property taxes and insurance until such time as those obligation need to be paid by the lender on the behalf of the borrower.

Fannie Mae (FNMA)

Federal National Mortgage Association. A private corporation dealing in the purchase of first mortgages.

Freddie Mac (FHLMC)

Federal Home Loan Mortgage Corporation. A federal agency that purchases both conventional and federally insured first mortgages from members of the Federal Reserve System and the Federal Home Loan Bank System.

Gross Monthly Income

For salaried borrowers, their monthly earnings prior to any deductions for income taxes or any other employee deductions. For self-employed borrowers, this would be the monthly earnings after all business expenses are deducted. Gross monthly income for self employed borrowers is usually averaged over the two years.

Insurance

Usually hazard (homeowner's) insurance on the home to be purchased, the cost of which are calculated on a monthly basis for qualification purposes. 'Insurance' may also include other insurance policies for flood, earthquake or hurricane.

Interest Rate

The rate used to determine the monthly payment on the loan. May also be known as 'rate' or 'note rate.'

Jumbo Loan

Generally, those loans which are in excess of FNMA/FHLMC limits, currently $240,000.00.

Lien

A legal claim against a property. Liens must be paid when the property is sold.

Loan Amount

The actual amount of money borrowed. Also known as the 'contract loan amount.' The loan amount is the sales price less any down payment plus any financed fees.

Lock

Depending on the loan program, the borrower may ask the lender to guarantee the interest rate quoted for the loan for a specific period of time, e.g. 30 days.

Margin

An number above a financial index, usually expressed as a percentage, which a lender adds to the index to determine the interest rate of adjustable rate mortgage.

Monthly Payment

Usually used to describe the monthly principal and interest payment on the loan without including monthly payments for taxes, insurance, and private mortgage insurance. May also be expressed as 'P&I'.

Non-Conforming Loans

Those loan amounts in excess of FNMA/FHLMC loan limits currently $240,000.00. May also refer to those loan programs which allow for income, credit and property characteristics which do not conform to FNMA/FHLMC.

Note Rate

The contract rate which is used to determine the actual principal and interest payment on the loan. It is the interest rate which appears on the loan contract, also known as the 'note.'

P&I

Abbreviation for "Principal & Interest" which is the payment on the loan. Each loan payment for a fully amortizing loan is part interest and part repayment of the money (i.e., principal) borrowed.

PITI

Abbreviation for 'Principal and Interest Taxes and Insurance.' Usually means the total monthly cost of owning the home and is used for qualification purposes.

PMI

Abbreviation for 'Private Mortgage Insurance' which insures the lender against any loss arising from the borrower's default (non-payment) on the loan. PMI is usually required when the borrower's down payment or equity is less than 20%. PMI is the private sector equivalent of FHA insurance on government loans.

Points

A dollar amount paid to a lender as a consideration for making the loan. One point is 1 percent of the loan amount. Also called discount points.

Pre-Paid Items

Recurring charges such as taxes, pre-paid interest and insurance. These cost can be paid by the buyer or seller or jointly both. Usually only the buyer incurs the pre-paid items.

Principal

The amount of money borrowed. Also that portion of the monthly payment which repays the money borrowed.

Purchase Price

The selling price agreed upon by buyer and seller.

Taxes

Property taxes payable on the home to be purchased. Lenders will take the annual amount of property taxes to be paid on the home and divide by 12 to determine the property tax obligation on a monthly basis for qualifying purposes.

Title

A document that provides evidence of ownership.

Title Insurance

Protection for lenders and homeowners against financial loss resulting from legal defects in the title.

Total Monthly Debt

The total of all debt to be paid monthly by the borrower. Includes the monthly payment on the proposed real estate loan and other monthly housing costs as well as payments on all other borrower revolving and installment debts.

Variables

To calculate a loan payment, one must know (1) the amount of money which is to be borrowed, (2) the length of time over which the money will be repaid (term), and (3) interest rate being charged on the loan amount. From these 'variables', one can mathematically calculate a loan payment. Changes in any or all of the variables will change the payment. Since the relationship between these variable is mathematical, one can solve for any one of the variables as long as the other three variables are known. For example, if one knew the payment amount, the interest rate, and the loan amount, then one could solve for the term of the loan.