Looking for the quick definition of a particular real estate term? Learn about these as they relate to real estate, financing, and loans using our glossary of terms below.
Simply select a letter from the list below by clicking on it. You will then be presented with a list of the most pertinent and most commonly used mortgage terms that begin with that letter.
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Abstract of title
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A specified piece of real estate's
title history in the form of a written summary.
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Abstract of Title
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A summary of recorded transactions
concerning a property. (An attorney or title insurance company examines an
abstract of title for any title defects which must be cleared before a buyer can
purchase clear, marketable and insurable title.)
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Acceleration Clause
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Condition in a mortgage that gives
the lender the right to require immediate repayment of the loan balance if
regular mortgage payments are not made, or for breach of other conditions of the
mortgage.
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Acceleration Clause
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A provision of a mortgage or note
which provides that the entire outstanding balance will become due and payable
in the event of default.
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Accrued interest
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Interest that is due but hasn't yet
been paid. It most often comes into play when you buy bonds in the secondary
market. Bonds usually pay interest every six months, but it is earned (accrued)
by bondholders every month. If you buy a bond halfway between interest payment
dates, you must pay the seller for the three months' interest accrued but not
yet received. You get the money back three months later when you receive the
interest payment for the entire six-month period.
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Accrued Interest
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Interest which has been incurred
but not paid.
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Acquisition indebtedness
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Mortgage debt on which the interest
is deductible. The debt must be used to buy, build or substantially improve your
principal residence or second home and must be secured by the property.
Qualifying interest paid on up to $1 million can be deducted.
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Active participation
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The level of involvement that real
estate owners must meet to qualify to deduct up to $25,000 of losses from rental
real estate. Failure to pass this test could make such losses nondeductible
under passive-loss rules.
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Adjustable Rate Mortgage (ARM)
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A mortgage in which the interest
rate is adjusted periodically based on an index. Also called a variable rate
mortgage.
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Adjustable Rate Mortgage (ARM)
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A mortgage in which the interest
rate is adjusted periodically based on a pre-selected index. Subject to certain
limitations, the rate and payments on an ARM loan rise and fall with the market.
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Adjusted basis
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Your basis in property is the
stepping-off point for determining taxable gain or loss. The basis generally
starts out as what you pay for the property, although special rules apply to
assets you inherit or receive as a gift. Your basis can be adjusted while you
own property. When rental property is involved, for example, you reduce your
basis by the amount of any depreciation you deduct while you own the property.
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Adjusted gross income
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This is your income from all
taxable sources minus certain adjustments. The adjustments ? sometimes called
above-the-line deductions because you can claim them whether or not you itemize
deductions ? include deductible contributions to regular individual retirement
accounts, medical savings accounts and Keogh plans, any penalty paid on early
withdrawal of savings, the deduction for 50% of the self-employment tax paid by
self-employed taxpayers, alimony payments and job-related moving expenses.
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Adjusted Gross Income (AGI)
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The amount used in the calculation
of an individual's income tax liability; one's income after certain adjustments
are made, but before standardized and itemized deductions and personal
exemptions are made.
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Adjustment Interval
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For an adjustable rate mortgage,
the time between changes in the interest rate charged. The most common
adjustment intervals are one, three or five years.
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Adjustment Interval or
Adjustment Period
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The length of time between rate
adjustments on an Adjustable Rate Mortgage (ARM).
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Agreement of Sale
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Contract signed by buyer and seller
stating the terms and conditions under which a property will be sold.
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Alimony
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Qualifying payments to an ex-spouse
that can be deducted as adjustments to income whether or not you itemize. The
recipient must include the payments in his or her taxable income.
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Alternative Documentation
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A substitute method of providing
the documentation necessary to approve a loan. For example, bank statements may
be substituted if it is not possible to provide written verification of the bank
balance directly from the borrower?s bank.
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Amortization
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Literally to "kill off" (root:
mort) the outstanding balance of a loan by making equal payments on a regular
schedule (usually monthly). The payments are structured so that the borrower
pays both interest and principal with each equal payment.
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Amortization
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The process of paying off a
mortgage in regular increments.
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Amortization Schedule
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This is the formal name for the
repayment schedule that shows each of your mortgage payments with a breakdown of
how much goes to principal and interest.
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Amortization Schedule
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A monthly repayment schedule
outlining how a loan will be paid off in fixed payments combining principal and
interest.
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Annual Percentage Rate (APR)
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The interest rate which reflects
the cost of a mortgage as a yearly rate. This rate is usually higher than the
stated loan rate for the mortgage, because it takes into account points and
other charges.
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Annual Percentage Rate (APR)
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A calculation that expresses the
total cost of a mortgage loan as a yearly rate (according to a federally
mandated procedure). The APR calculation takes into account monthly interest
payments, mortgage insurance, points, and certain fees paid at origination. It
generally results in a rate slightly higher than the stated interest rate on the
loan.
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Annuity
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A series of regular payments,
usually from an insurance company, guaranteed to continue for a specific time,
usually the annuitant's lifetime, in exchange for a single payment or a series
of payments to the company. With a deferred annuity, payments begin sometime in
the future. With an immediate annuity, payments begin right away. A fixed
annuity pays a fixed income stream for the life of the contract. With a variable
annuity, the payments may change according to the relative investment success of
the insurance company.
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Application
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An initial statement of personal
and financial information required to approve a loan provided by the borrower
and necessary to intitiate the approval process for a loan.
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Application Fee
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The fee charged by the lender to
the borrower for applying for a loan. Payment of this fee does not guarantee
that a loan will be approved. Some lenders may apply the cost of the application
fee to certain closing costs.
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Appraisal
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The determination of property value
based on recent sales information of similar properties.
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Appraisal
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A written estimate of a property?s
current market value, based on recent sales information for similar properties,
the condition of the property and the neighborhood?s impact on future property
value.
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Appraisal Fee
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A fee charged by a licensed,
certified appraiser to provide an appraisal.
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APR
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See Annual Percentage Rate.
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ARM
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See Adjustable Rate Mortgage.
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ARM fund
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A mutual fund that invests in
adjustable-rate mortgages (ARMs).
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Assessment
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A local tax levied against a
property for a specific purpose, such as road or sidewalk construction or sewer
or street light installation.
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Assignment
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The transfer of property rights by
one person, the assignor, to another, the assignee.
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Assumability
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A loan feature that allows the loan
to be transferred from the seller to the purchaser of a home with the same terms
and conditions, subject to lender approval.
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Assumable Loan
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These loans may be passed on from a
seller of a home to the buyer. The buyer "assumes" all outstanding payments.
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Balance Sheet
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A document showing the financial
situation--assets, liabilities, and net worth--of a company at a specific point
in time.
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Balloon Mortgage
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Behaves like a fixed-rate mortgage
for a set number of years (usually five or seven) and then must be paid off in
full in a single "balloon" payment.Balloon loans are popular with those
expecting to sell or refinance their property within a definite period of time.
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Balloon Mortgage
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A short-term, fixed-rate loan with
low payments for a set number of years and a large balloon payment of the
remainder of the principal due at the end of the term.
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Balloon Payment
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A balloon payment is a large
payment at the end of a mortgage term. Balloon payments are usually required
when the interest rate or payment is low enough that the payment is not enough
to cover the principal and interest during the loan. At the end of the mortgage
there is still a balance which must be settled in one payment.
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Bankruptcy
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Proclamation by a court of an
individual?s (or organization?s) state of insolvency, or inability to pay debts.
Petition may be brought by an individual or creditors, with a goal of orderly
and equitable settlement of obligations.
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Basis
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See Adjusted basis.
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Bearer
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The legal owner of a piece of
property.
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Below-market-rate loans
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If you make an interest-free or
bargain-rate loan to a friend or relative, you may be required to include in
your taxable income some of the interest the IRS figures you should have
charged.
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Bequest
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A gift of personal property by
will.
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Bi-weekly Mortgage
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A payment plan under which the
borrower pays one half of a monthly payment every two weeks.
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Bill of Sale
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A document by which one transfers
ownership of goods to another.
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Bona Fide
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In good faith.
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Bond
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A document representing a right to
certain payments on underlying collateral.
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Borrower
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(Mortgagor) - An individual who
applies for and receives a loan in the form of a mortgage with the intention of
repaying the loan in full
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Broker
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An individual in the business of
assisting in arranging funding or negotiating contracts for a client but who
does not loan the money himself. Brokers usually charge a fee or receive a
commission for their services.
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Broker
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An individual who assists in
arranging funding or negotiating contracts for a client but does not loan money
himself.
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Buy-down
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A situation in which the seller
contributes money, allowing the lender to give the buyer a lower rate and
payment, usually in exchange for an increase in sales price.
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Buyers? Market
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Market conditions that favor
buyers. With more sellers than buyers in the market, buyers have ample choice of
properties and can negotiate lower prices.
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Buyer?s Broker
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An agent hired by a buyer to locate
a property for purchase and to represent the buyer in negotiations with the
seller's broker.
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Call Option
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A loan feature that allows the
lender to require repayment of the loan in full before the term of the loan is
up.
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Caps
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A set percentage amount by which an
adjustable rate mortgage may adjust each adjustment period. For adjustable
loans, caps are usually quoted as two numbers as in 2/6. The first number
indicates how much a loan may adjust at each adjustment period while the second
number indicates how much a loan may adjust over its lifetime.
Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are
quoted with 3 numbers as in 3/2/6 which would mean that the first adjustment may
be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime
cap is 6%.
Two-Step loans are quoted with a single cap, which is the amount by which the
loan may adjust at its single adjustment date.
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Caps
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Limits on changes in ARM interest
rates or monthly payments, either in an adjustment period or over the life of
the loan.
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Caps (interest)
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Consumer safeguards which limit the
amount the interest rate on an adjustable rate mortgage can change in an
adjustment interval and/or over the life of the loan.
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Caps (payment)
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Consumer safeguards which limit the
amount monthly payments on an adjustable rate mortgage may change. Since they do
not limit the amount of interest the lender is earning, payment caps may cause
negative amortization.
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Cash Out
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A refinance for more than the
balance of the current mortgage. The excess money taken out reduces the
borrower?s equity.
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Cashier?s Check (or Bank Check)
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A check whose payment is guaranteed
because it was paid for in advance and is drawn on the bank?s account instead of
the customer?s.
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CC&Rs
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See Covenants, Conditions and
Restrictions
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Ceiling
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The maximum allowable interest rate
of an adjustable rate mortgage.
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Certificate of Eligibility
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Document issued by the Veterans
Administration to qualified veterans which entitles them to VA-guaranteed loans.
Obtainable through local VA offices by submitting form DD-214 (Separation Paper)
and VA form 1880 (request for Certificate of Eligibility).
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Certificate of Occupancy
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Document issued by local government
agency stating that a property meets the requirements of health and building
codes.
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Certificate of Reasonable Value
(CRV)
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A property appraisal performed by a
VA approved appraiser which establishes the limit on the principal of the VA
loan.
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Certificate of Title
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Written opinion of the status of
title to a property, given by an attorney or title company. This certificate
does not offer the protection given by title insurance.
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Certificate of Veteran Status
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Document given to veterans or
reservists who have served 90 days of continuous active duty (including training
time) which enables them to obtain lower down payments on certain FAHFHA-insured
loans. Obtainable through local VA offices by submitting form DD-214 (Separation
Paper) with form 26-8261a (request for certificate of veteran status.)
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Certified Check
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A check drawn on the issuer's
account for funds that have been segregated by the bank, thus guaranteeing
sufficient funds for payment.
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Chain of Title
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The chronological order of
conveyance of a property from the original owner to the present owner.
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Charitable contribution
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A gift of cash or property to a
qualified charity for which a tax deduction is allowed.
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Child support
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Payments made under a divorce or
separation agreement for support of a child. Payments are neither deductible by
the person who pays them nor taxable income to the person who receives the
money.
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Clear Title
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A marketable title, free of clouds
and disputes.
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Closing (or Settlement)
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Meeting between the buyer, seller
and lender or their agents at which property and funds legally change hands.
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Closing Agent
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Neutral third party appointed to
act as a custodian for documents and funds during the transfer of property from
seller to buyer. Depending on local law and custom, this could be an attorney,
escrow agent or title company.
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Closing Costs
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Fees incurred in a real estate or
mortgage transaction paid by borrower and/or seller at the closing of the
transaction.
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Closing/Settlement Statement
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A form prepared by the closing
agent that itemizes the closing costs associated with purchasing or refinancing
a home. Also see HUD-1.
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Cloud on Title
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An outstanding claim or encumbrance
that, if valid, would affect or impair the owner's title.
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COFI
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See Cost of Funds Index
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Collateral
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Assets that secure a loan (in the
case of a mortgage, real property serves as collateral).
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Combined Loan to Value (CLTV)
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The percentage of the property
valued borrowed through a combination of more than one loan (for example, first
mortgage and home equity line of credit. Mathematically, combined loan and line
of credit amounts/property value = Combined Loan to Value Ratio).
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Commission
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Money paid to a real estate agent
or broker by the seller (usually 6-7% of the sale price of the house).
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Commitment
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A formal offer by a lender to make
a loan under certain terms or conditions. to a borrower.
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Condominium
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A form of property ownership in
which the homeowner holds title to an individual dwelling unit and an interest
in common areas and facilities of a multi-unit project.
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Conforming Loan
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A mortgage loan eligible for
purchase by the two Federally sponsored housing agencies, Fannie Mae and Freddie
Mac.
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Construction APR
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A calculation that expresses the
cost of a mortgage loan as a yearly rate (according to a federally mandated
procedure) over the life of the loan, including the construction phase. The APR
calculation takes into account monthly interest payments, mortgage insurance,
points, and certain fees paid at origination. It generally results in a rate
higher than the stated interest rate on the Note, as well as the estimated APR
disclosed on the permanent financing phase of the loan term. You may receive two
APRs, one for the construction period of your loan and the other for the
permanent financing of your loan or the APR can be combined for both the
construction and permanent periods of your loan.
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Construction Loan
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A short term interim loan to fund
the construction of buildings or homes, which usually advances the money in
installments as work progresses.
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Construction-to-Permanent (CTP)
Loan
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A construction loan that
automatically converts to a permanent loan at the end of the construction
period.
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Contingency
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A condition which must be satisfied
before a contract is legally binding--before a sale can close.
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Contract of Sale
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The agreement between the buyer and
seller on the purchase price, terms, and conditions of a sale.
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Conventional Loan
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A mortgage not insured by the FHA
or guaranteed by the VA.
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Conversion Clause
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A provision in some ARMs that
allows changing an ARM to a fixed-rate loan, usually after the first adjustment
period. The new fixed rate is set at based on a formula tied to current rates,
and there may be a charge for the conversion feature.
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Convertible ARMs
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ARMs with the option of conversion
to a fixed loan during a given time period (see "Conversion Clause").
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Conveyance
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The transfer of a deed, lease or
mortgage.
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Cost of Funds Index (COFI)
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A common index used in adjustable
rate loans based on the weighted-average interest rate paid for deposits by
savings institutions that are members of the 11th Federal Home Loan Bank
District.
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Courier / Mail Fees
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Fees charged by the closing agent
for shipment of loan documents and related paperwork. IndyMac Bank does not pass
our own courier and mail fees to you.
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Covenants, Conditions and
Restrictions (CC&Rs)
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A document that defines the use,
requirements and restrictions of a condominium or Planned Unit Development
(PUD).
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Credit Report
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A report detailing the credit
history of a prospective borrower, used by lenders to help determine
creditworthiness.
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Credit Report Fee
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Fee paid to a credit reporting
agency so that we can obtain a copy of your credit history and credit score.
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Debt-to-Income Ratio
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A figure, expressed as a ratio,
that compares the amount of recurring debt payments a borrower is obligated to
make to the amount of their income.
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Deductions
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Expenses you are permitted to
subtract from your taxable income. All taxpayers may claim a standard-deduction
amount - $6,900 for 1997 and $7,100 for 1998 joint returns, for example. When
qualifying expenses exceed the standard deduction, you claim the higher amount
by itemizing your deductions. Although no records are needed to back up your
standard deduction, you must maintain records of qualifying expenditures if you
itemize.
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Deed
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Legal document by which title to a
property is transferred from one owner to another. The deed contains a
description of the property and is signed, witnessed, and delivered to the buyer
at closing.
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Deed of Trust
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Document creating a lien on a
property as security for the payment of a debt. In some states, a mortgage is
used instead.
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Default
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Failure to meet legal obligations
in a contract, including failure to make payments on a loan. A mortgage is
generally considered to be in default when a payment is 30 days past due.
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Deferred Interest
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Amount added to the balance of a
loan when monthly payments are insufficient to cover the interest incurred. This
results in negative amortization.
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Delinquency
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Failure to make required payments
on time.
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Deposit
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Cash paid to the seller when a
formal sales contract is signed.
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Depreciation
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A deduction to reflect the gradual
loss of value of business property as it wears out. The law assigns a tax life
to various types of property; your basis in such property is deducted over that
time period.
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Depreciation
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Decline in property value.
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Discount Points
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See Points
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Document Review
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Fee charged by lender for review of
documents necessary to fund a loan.
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Documentary Stamps
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A state tax, in the forms of
stamps, required on deeds and mortgages when real estate title passes from one
owner to another.
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Down Payment
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In a home purchase, the difference
between the purchase price and the mortgage amount.
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Earned income
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Compensation, such as salary,
commissions and tips, you receive for your personal services. This is
distinguished from unearned or investment income, such as interest, dividends
and capital gains.
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Earnest Money
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Deposit made by a buyer toward the
down payment as evidence of good faith when the purchase agreement is signed.
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ECOA
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See Equal Credit Opportunity Act
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Effective Interest Rate
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The cost of a mortgage expressed as
a yearly rate, usually higher than the interest rate on the mortgage since this
figure factors in the up-front costs of acquiring the loan.
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Encumbrance
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A legal right or interest in a
property that affects title and may lessen the property value.
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Equal Credit Opportunity Act
(ECOA)
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Federal law requiring creditors to
make credit equally available without discrimination based on race, color,
religion, national origin, age, sex, marital status or receipt of income from
public assistance programs.
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Equity
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Equity is the value of the property
minus the amount of money still owed on the loan. If you have a $150,000 home
and still owe $125,000 on the mortgage, you have $25,000 in equity assuming no
complicating factors like market value changes.
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Equity
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The difference between the current
market value of a property and the outstanding mortgage balance.
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Equity Loan
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A loan based on the borrower's
equity in his or her home.
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Escrow
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An escrow is a holding account for
money (or other securities) that is to be used for a specific purpose. In the
case of a mortgage, when you make a mortgage payment, you are paying an
additional amount above the principal and interest which is to be held for taxes
and insurance. This money is held in escrow until it is time to make a payment
to your insurance company or to the tax collector. At that time the escrow agent
will disburse funds to make the payment.
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Escrow
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1. Neutral third party
appointed to act as a custodian for documents and funds during the transfer of
property from seller to buyer or in the course of refinancing property.
2. Account held by lender containing funds collected in conjunction with
monthly mortgage payments. The funds in the escrow account are used by the
lender to pay annual expenses such as taxes and insurance on behalf of the
borrower.
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Escrow Account
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Account held by lender containing
funds collected in conjunction with monthly mortgage payments. Also known as
impounds, the funds in this account are held in trust by the lender on behalf of
the borrower, and are used to pay expenses such as property taxes and
homeowner?s insurance.
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Escrow Fee
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This is the fee paid to the escrow
agent, title agent, or attorney to execute the closing of your loan. This party
completes tasks including coordinating document signing, obtaining payoff
information for existing liens, obtain evidence of homeowners insurance,
coordinate with the title insurer to obtain clear title, and disburse loan
proceeds.
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Escrow Officer
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See Closing Agent
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Estate
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All assets owned by an individual
at death, to be distributed according to the individual's will (or a court
ruling if there is no will). see also real estate, administrator, beneficiary,
decedent, executor, gross estate, net estate, inheritance.
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Estimated Settlement (or
Closing) Statement
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A document provided by the closing
agent a few days before closing, detailing all costs and indicating the final
sum the buyer will be required to bring to the closing.
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Expense-to-Income Ratio
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Also known as Back-End Ratio and
Debt-to-Income Ratio. The figure derived by dividing a borrower?s monthly
financial obligations by his/her gross monthly income.
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Fannie Mae
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The acronym for the Federal
National Mortgage Association, which buys mortgages on the secondary market,
repackages them and sells off pieces to investors. The effect is to infuse the
mortgage markets with fresh money.
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Fannie Mae (FNMA)
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Corporation created by Congress
that buys and sells residential mortgages. Fannie Mae provides funds for one in
seven mortgages.
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Farmer's Home Administration
(FmHA)
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An agency of the U.S. Department of
Agriculture, that provides financing for purchasers of homes and farms in small
towns and rural areas.
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FDIC
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See Federal Deposit Insurance
Corporation.
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Federal Deposit Insurance
Corporation (FDIC)
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Independent deposit insurance
agency created by Congress to maintain stability and public confidence in the
nation's banking system.
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Federal Home Loan Bank Board
(FHLBB)
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Former name for the regulatory and
supervisory agency of federally chartered savings institutions, now called the
Office of Thrift Supervision.
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Federal Home Loan Mortgage
Corporation (FHLMC)
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See Freddie Mac
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Federal Housing Administration
(FHA)
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Government agency, division of the
Department of Housing and Urban Development, which insures residential mortgage
loans made by private lenders and sets standards for underwriting mortgage
loans.
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Federal National Mortgage
Association (FNMA)
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See Fannie Mae
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Federal Reserve
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Central bank of the United States
and major regulatory agency for many commercial banks.
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Fee Simple
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Absolute ownership of real
property. FHA - See Federal Housing Administration.
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FHA
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The Federal Housing Administration
(FHA) is a federal organization that guarantees mortgage loans. The FHA does not
loan money. There are many rules in the FHA designed to qualify buyers and
property. The FHA qualifies the buyer according to gross income, and the
property to be purchased must meet the FHA standards.
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FHA Loan
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Loan insured by the FHA for low to
middle income homes, open to all qualified home purchasers.
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FHLBB
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See Federal Home Loan Bank Board.
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FHLMC
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See Federal Home Loan Mortgage
Corporation. First Mortgage - The primary lien against a property.
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FICO Score
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A credit evaluation score developed
by Fair, Isaac, and Co., used by lenders as one factor in making a loan
decision. Some methods of improving a score are to establish and maintain a
payment history on credit accounts, keep public records (bankruptcies,
judgments, etc.) and collection accounts to a minimum, pay down loans, keep
credit cards well below their limit, avoid late payments, and limit applying for
new credit applied.
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Fixed Rate
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An interest rate that is fixed for
the term of the loan.
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Fixed-Rate Mortgage
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A mortgage whose interest rate does
not change for the life of the loan. Payments are also fixed.
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Flood Certification
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Federal law requires that you
obtain flood insurance, if you obtain a mortgage, and you property is in a
designated flood zone. This fee is paid to a third party to determine the flood
zone status of your property, and to notify us of changes to the flood zone map
that effect your property during the life of your loan.
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Flood Insurance
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A form of hazard insurance required
by the federal government to cover property damage or loss in flood zones.
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Floor
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The minimum interest rate payable
on an adjustable-rate mortgage.
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Forbearance
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Grace period given when a lender
postpones foreclosure to give the borrower time to catch up on overdue payments.
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Foreclosure (or Repossession)
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Legal process by which the lender
forces the sale of a property when the borrower has not met the mortgage terms.
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Freddie Mac
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The nickname for the Federal Home
Loan Mortgage Corporation; it operates similarly to Fannie Mae.
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Freddie Mac (FHLMC)
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Quasi-governmental agency that
purchases conventional mortgages from insured depository institutions and
HUD-approved mortgage bankers.
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Future Value of Money
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The future value of money is the
value that your money will have after it has compounded at some interest rate
for a period of time. If you put $100 in the bank now at 3% interest rate
compounded annually, its future value is $103. Conversely, the present value of
the $103 that you will have in one year is presently $100 if it compounds
annually at 3% interest. Future and present values are essential when comparing
values of money now and its worth in the future. For example, you may have a
lottery in your state. You might know that the next prize amount is worth
$1,000,000. What is not said many times is that this is $1,000,000 future value.
That is, you will likely not receive $1,000,000 cash (less income tax, of
course) if you were to be the sole winner. Instead you will probably receive a
considerably reduced sum of money, that if invested at prevailing rates, will be
worth $1,000,000 in 20 years. Let us say the prevailing rate is 5% compounded
annually. If you receive $376,500 and deposit into this account you will have
$998,966 after 20 years. So the future value of $376,000 is nearly $1M!
Conversely, the present value of $1,000,000 twenty years from now is $376,000
now.
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GFE
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See Good Faith Estimate
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Ginnie Mae
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The nickname for the Government
National Mortgage Association, which buys up mortgages in the secondary market
and sells them to investors via securities known as pass-through certificates.
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Ginnie Mae
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See Government National Mortgage
Association.
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GNMA
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See Government National Mortgage
Association.
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GNMA, or Ginnie Mae
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Government agency that provides
funds for VA and FHA loans.
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Good Faith Estimate
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Written estimate of costs the
borrower will pay at closing, provided by a lender within three days of loan
application.
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Grace Period
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Period of time during which a loan
payment may be made after its due date without incurring a late penalty.
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Graduated Payment Mortgage
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A mortgage where the payments start
out lower so the borrower can qualify easier. The payments will gradually
increase over three to five years to a standard fixed payment. This type of
mortgage can cause the principal to actually increase for the first few years
resulting in you owing more than you initially started with. In some cases the
interest on the mortgage will be more than the payment resulting in this strange
situation.
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Graduated Payment Mortgage (GPM)
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Mortgage in which initial low
payments (with potential negative amortization) increase regularly for several
years and then level off.
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Gross income
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All of your income from taxable
sources, before subtracting any adjustments, deductions or exemptions.
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Gross Income
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Total income before taxes or
expenses are deducted.
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Gross Monthly Income
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Total monthly income before taxes
or expenses are deducted. Used in the loan origination process to calculate
borrower?s ability to make payments on a loan.
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Growing Equity Mortgage
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A fixed-rate loan in which payments
increase by a predetermined amount each year, reducing the outstanding balance
of the loan. This accelerated payment plan allows repayment of a 30-year loan in
15 to 20 years.
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Guarantee or Guaranty
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A promise by one party to pay a
debt or perform an obligation contracted by another in the event of that
person's default.
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Hazard Insurance
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A policy that protects the insured
against loss due to fire or certain natural disasters in exchange for a premium
paid to the insurer. Also known as Home Owner?s Insurance or fire insurance.
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Head of household
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A filing status with tax rates that
are lower than those that apply to single individuals. It's available to
unmarried taxpayers who pay more than half the cost of maintaining a home for a
dependent relative or unmarried child. Generally, the taxpayer and dependent
must live in the same home.
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Home Equity Line of Credit
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A revolving line of credit secured
by the equity in the home. Unlike a Home Equity Loan, these funds may be drawn
and repaid like a credit card.
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Home equity loan
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Debt secured by your principal
residence or second home (such as a second mortgage or home-equity line of
credit) that is not used to buy, build or substantially improve the property.
Although interest on most loans is not deductible (see Personal interest),
interest on up to $100,000 of home-equity debt remains deductible.
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Home Equity Loan
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An additional mortgage secured by
the equity in the home. All funds for this loan are disbursed at closing. (In
contrast, see Home Equity Line of Credit)
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Homeowners Warranty
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A type of insurance that covers
repairs to specified parts of a house for a specific period of time.
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Housing and Urban Development
(HUD)
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A U.S. government agency
established to implement federal housing and community development programs;
oversees the Federal Housing Administration.
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Housing Code
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Local government ordinance that
sets minimum standards of safety and sanitation for existing residential
buildings.
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Housing Expense-to-Income Ratio
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The ratio, expressed as a
percentage, the result of dividing a borrower's housing expenses by his/her
gross monthly income. HUD - See Housing and Urban Development.
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HUD-1 Settlement Statement
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A form mandated by the federal
government that itemizes the closing costs associated with purchasing a home.
Also see Estimated Settlement Statement.
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Impound (or Reserves)
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Portion of a borrower's monthly
payments held by the lender to pay for taxes, insurance, and other items as they
become due.
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Impound Account
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See Escrow Account
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Index
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A published rate used by lenders to
calculate interest adjustments on adjustable rate mortgages (Index + Margin =
Interest Rate). Common indexes include 1-Year Treasury securities, COFI (Cost Of
Funds Index) and Six-Month LIBOR (London Interbank Offered Rate).
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Initial Rate
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The rate charged during the first
interval of an adjustable rate mortgage.
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Insolvency
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Condition of a person unable to pay
debts as they fall due.
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Interest
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Interest is money you pay a lender
for the use of their money. When a lender loans you money, the lender wants all
the money back plus a fee for the use of that money. It is usually expressed in
terms of a percentage of the principal. There are several ways to identify
interest rates. In its basic form interest can be a flat percentage of the
initial amount loaned. If you borrow $1,000 and agree to pay 10% interest,
paying the loan back in one payment at the end of the year, you will pay $100 in
interest for a total of $1,100. Mortgage interest is usually more complicated
since the loan can extend for thirty years and payments can be made at regular
intervals of months or weeks. Interest rates are usually quoted for a one-year
period and the monthly interest applied to a monthly payment is one-twelfth of
the interest. If your annual interest is 12%, your monthly interest rate is 1%.
The annual percentage rate (APR) actually is different from the interest you
will pay, though. The actual interest rate you will pay is known as the
effective rate. The difference is not great, but can add up to a substantial
amount when the difference is accumulated over many years. As an example, let us
take the same $1,000 at 12%. At the end of the first month, January, the
interest paid is 1% so the balance becomes $1,010, less a payment of $88.85. The
February balance is $921.15. Now the 1% of the new balance is $9.21, not $10 as
was the first month. Minus a payment of $88.85 and the new March balance is
$841.51. As you can see, you are paying $88.85 for 12 months, for a total of
$1,066.20. This calculates to an effective interest rate of 6.62% ( $1,066.22 /
$1.000).
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Interest
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Charge paid for borrowing money.
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Interest Rate
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The rate expressed as a percentage
of the outstanding balance used to calculate interest charges.
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Interest Rate Cap
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A safeguard built into ARMs to
prevent drastic changes in interest rates.
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Investment interest
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Interest paid on loans used for
investment purposes. You can deduct this interest up to the amount of investment
income you report
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Late Charge
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Penalty paid by a borrower when a
payment is made after the due date.
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Lease-Purchase Mortgage Loan
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An alternative financing option
that allows low- and moderate-income homebuyers to lease a home from a nonprofit
organization with an option to buy. Monthly rental payments cover mortgage
payments and include an additional amount that is saved toward a down payment.
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Lender
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The bank, mortgage company, or
mortgage broker offering the loan.
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Lender's Title Insurance
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Premium paid to the title insurance
company to insure that you are the legal owner of the property, there are no
liens or encumbrances on your property that effect the transaction, there are no
legal claims or pending legal claims against the property, and there are no tax
liens on the property.
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LIBOR (London Interbank Offered
Rate)
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The interest rate charged among
banks for short-term Eurodollar loans, and a common index for adjustable rate
mortgages.
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Lien
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A legal claim against a property
that must be paid when the property is sold.
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Lifetime Interest Rate Cap
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The highest interest rate that can
be charged for an adjustable rate mortgage during the life of the loan.
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Loan Administration (or Loan
Servicing)
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The collection of mortgage payments
from borrowers and related responsibilities (such as handling escrows for
property tax and insurance, foreclosing on defaulted loans and remitting
payments to investors).
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Loan Application
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Document required by lenders prior
to loan approval containing detailed information about the borrower and
property.
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Loan Application Fee
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Fee paid by prospective buyer to
lender when applying for a mortgage. Loan Origination Fee (Processing Fee) - Fee
charged by a lender that compensates for the work in evaluating and processing
the loan.
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Loan Servicing (or Loan
Administration)
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The collection of mortgage payments
from borrowers and related responsibilities (such as handling escrows for
property tax and insurance, foreclosing on defaulted loans and remitting
payments to investors).
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Loan to Value (LTV) Ratio
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The percentage of the property
value borrowed (loan amount/property value = loan to value ratio).
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Lock or Lock In
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A lender's guarantee of an interest
rate and related points for a set period of time, usually between loan
application and loan closing. Protects borrower against rate increases during
that time.
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LTV
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See Loan To Value Ratio
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Margin
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The percentage amount added to an
index to calculate the interest rate of an adjustable rate mortgage at each
adjustment.
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Market Value
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The value that a willing seller
would accept and a willing buyer would offer given a reasonable time for the
seller to market a property.
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Marketable Title
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A title that is free and clear of
liens, clouds, or other defects which would prevent the sale of the property.
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MIP (Mortgage Insurance Premium)
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Insurance purchased by borrower to
insure against default on government (FHA or VA) loans.
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Monthly Housing Expense
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Total monthly expense of principal,
interest, taxes and insurance.
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Mortgage
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A mortgage is a legal document that
is used to secure the performance of an obligation. A typical real estate
transaction consists of a lender (mortgagee) loaning money to the buyer
(mortgagor). The mortgage creates a lien on the property as security for the
debt; a promissory note is signed by the mortgagor to create the liability of
the buyer. For a valid mortgage there must be both the note and the pledge.
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Mortgage
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Document creating a lien on a
property as security for the payment of a debt. In some states, a Deed of Trust
is used instead.
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Mortgage Banker
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A lender that originates and funds,
then sells and services mortgage loans.
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Mortgage Broker
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A person or entity that arranges
financing for borrowers, but places loans with lenders rather than funding them
with the broker?s own money.
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Mortgage Insurance
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Insurance purchased by a buyer to
cover the lender?s risk of loss. Mortgage Insurance is generally required by
lenders when the down payment is less than 20% of the purchase price.
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Mortgage interest
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Deductible interest paid on debt
that qualifies as acquisition indebtedness or home-equity debt.
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Mortgage Loan
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A loan for which real estate serves
as collateral to provide for repayment in case of default. Mortgage Note - Legal
document obligating a borrower to repay a loan at a stated interest rate during
a specified period of time. The agreement is secured by a mortgage.
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Mortgagee
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The lender in a mortgage loan
transaction.
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Mortgagor
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(Borrower) - An individual who
applies for and receives a loan in the form of a mortgage with the intention of
repaying the loan in full
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Mortgagor
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The borrower in a mortgage loan
transaction.
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Negative amortization
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With some mortgages, it is possible
to have a payment calculated such that the principal and interest total up to
less than the amount that you would normally pay for a self-amortizing loan. In
this situation, since your payment does not cover the principal and interest,
the amount that you are short is still yet to be paid and can accumulate more
interest than would normally be accumulated. Therefore the balance you owe does
not decrease as much, and the total amount you will pay for the loan will be
more than for a self-amortizing loan. In essence you are financing additional
interest.
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Negative Amortization
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Increase in principal balance that
occurs when monthly payments are not large enough to pay all interest incurred
on a loan, usually caused when payment caps prevent sufficient payment
increases. Deferred interest is added to the loan balance, resulting in the
borrower owing more than the original amount of the loan.
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Net
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After taxes.
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Net Effective Income
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Gross income minus federal income
tax.
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Net worth
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Your net worth is the value of your
holdings after your liabilities are satisfied. For example, let us say you own
one home already valued at $100,000. You still owe $80,000, you have $5,000 in
loans and credit cards, and you have $25,000 in the bank. Your net worth is
$25,000 + $100,000 - $80,000 - $5,000, or $40,000.
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Non Assumption Clause
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A statement in a mortgage contract
forbidding the assumption of the mortgage by another borrower without the prior
approval of the lender.
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Nondischargeable Debt
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Debt, such as taxes, that cannot be
forgiven in a bankruptcy liquidation.
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Note
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Legal document stating the terms of
a debt and a promise to repay it.
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Notice of Default
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Written notice to a borrower that a
default has occurred and that legal action may be taken.
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Par
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Mortgage Rate: The face value of a
rate with no points charged or credited.
Stock Price: The face value of a stock or bond. Also called par value.
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Payment
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The periodic payment due on a
mortgage loan each payment period (normally a month) to cover accrued interest
and to repay a portion of the principal balance. Most mortgages are set up where
the payments will reduce the principal balance a little with each payment until
the balance is zero when the last payment is made.
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Payment Cap
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Limit on the amount by which a
borrower?s adjustable rate mortgage payments may increase, regardless of rise in
interest rates. May result in negative amortization.
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Per Diem Interest
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Interest calculated per day.
Depending on the day of the month on which closing takes place, borrower pays
interest from the date of closing to the end of the month. The first mortgage
payment of a loan is generally due the first of the following month.
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Periodic Interest Rate Cap
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A limit on the amount that interest
rates can change at each adjustment period.
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Permanent Loan
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A long term mortgage of ten years
or more.
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PITI
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This abbreviation stands for
principal, interest, tax, insurance. It is a common term to describe the payment
one makes on a mortgage, when that payment includes taxes and insurance.
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PITI
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Abbreviation for Principal,
Interest, Taxes and Insurance, the components of a monthly mortgage payment,
also called Monthly Housing Expenses.
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Pledged Account Mortgage (PAM)
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Money is placed in a pledged
savings account. This fund, plus earned interest, is used to gradually reduce
mortgage payments.
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Points
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Charges connected with getting a
mortgage. Each point is equal to 1% of the mortgage amount. Points paid on a
mortgage to buy or improve your principal residence are generally fully
deductible in the year you pay them. Points paid to refinance a principal home
or buy any other property must be deducted over the life of the loan.
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Points (or Discount Points)
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Money paid to a lender at closing
in exchange for a lower interest rate. Each point is equal to 1% of the loan
amount.
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Prepayment penalty
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Prepayment penalties are those
charges which a lender imposes if you wish to pay off your loan early. The loans
which will carry a prepayment penalty often penalize you only for paying off the
loan early in the first five years, and thereafter a graduating scale may apply,
or there may be no prepayment penalty at all after that initial five year
period.
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Present value of money
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Present Value and Future of Money
The future value of money is the value that your money will have after it has
compounded at some interest rate for a period of time. If you put $100 in the
bank now at 3% interest rate compounded annually, its future value is $103.
Conversely, the present value of the $103 that you will have in one year is
presently $100 if it compounds annually at 3% interest. Future and present
values are essential when comparing values of money now and its worth in the
future. For example, you may have a lottery in your state. You might know that
the next prize amount is worth $1,000,000. What is not said many times is that
this is $1,000,000 future value. That is, you will likely not receive $1,000,000
cash (less income tax, of course) if you were to be the sole winner. Instead you
will probably receive a considerably reduced sum of money, that if invested at
prevailing rates, will be worth $1,000,000 in 20 years. Let us say the
prevailing rate is 5% compounded annually. If you receive $376,500 and deposit
into this account you will have $998,966 after 20 years. So the future value of
$376,000 is nearly $1M! Conversely, the present value of $1,000,000 twenty years
from now is $376,000 now.
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Principal
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The principal amount of the loan is
the amount still owed on the loan. When you first obtain a loan, the principal
is the amount borrowed. As you make payments, only a portion of each payment is
applied to the principal; the rest is applied to interest, and property tax and
insurance if those are included in your payment. You may also be paying for
taxes and insurance if you are payment is set up that way. The principal amount
for a fixed-interest rate mortgage typically decreases slowly at first, with
most of the payment being applied to the interest. As time goes on, the
principal gradually received more of the payment since less of the payment is
applied to the interest.
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