Confused With All of the Real Estate Buzz Words?
As one reads the newspaper, or listens to conversations about today’s housing market, there are lots of buzz words that you may or may not understand. Hopefully this glossary of terms will help you to understand a little better.
Purchase Money Loan: The mortgage that was originated at the time of, and for the purpose of, buying the property.
Refinance: A mortgage that was originated after the purchase of a property for the purpose of changing the rate and terms of the loan.
Cash Out Refinance: A mortgage that was originated after the purchase of a property where the homeowner borrowed against their home in exchange for cash.
Subprime Mortgage: A loan made to a risky borrower in exchange for a higher interest rate and usually less favorable terms.
Equity: The value of the property beyond the amount of the mortgage debt.
Short Sale: A hardship sale of property where the mortgage debt is higher than the value of the property and in order to sell, the owner needs permission from their lender to forgive a portion of the mortgage debt.
Foreclosure: A property that was taken back by the lender for non-payment.
REO: A term used by lenders for a foreclosed property, which refers to the lender’s portfolio of Real Estate Owned.
Foreclosure Process: Typically, a 4-6 month process that is required by law, which allows the owner time to bring the payments current or pay the loan off before the lender takes possession.
NOD (Notice of Default): The beginning of the foreclosure process. The homeowner now has a minimum of 90 days to bring the loan current.
First Trust Deed: A recorded document between the borrower and the lender which states that in the event that the borrower defaults, the lender will take the property back. The first recorded trust deed has priority over subsequent trust deeds.
Second Trust Deed: A subsequent trust deed that secures a second loan against the property. This trust deed would have priority over any other trust deed except for the first.
Amortization: The reduction of a debt by periodic payments i.e. monthly mortgage payments.
Interest Only Loan: A loan where the required monthly payment only pays the accruing interest and does not pay down the loan balance.
Negative Amortization: A loan where the required monthly payment only pays a portion of the accruing interest and does not pay down the loan balance. The unpaid interest is added to the loan balance. The result is that your loan balance increases beyond what you originally borrowed.
Balloon Payment: The final payment of a loan where the entire remaining balance is due and payable at one time. This is necessary in an interest only or a negative amortization loan since no principal reduction was ever made. It is important to know whether your loan has a balloon payment or not.
Pre-Payment Penalty: A loan fee that is charged at the end of the loan when the borrower pays the loan off early. It is important to know whether your loan has a pre-payment penalty or not.
Fixed Rate Mortgage: A mortgage where the interest rate stays the same for the entire term of the loan.
ARM (Adjustable Rate Mortgage): A mortgage where the interest rate changes periodically throughout the term of the loan. There are many different types of ARMs. It is important that you understand how often and how much the rate can change.
This is just a partial list of the many terms that should be understood when deciding to purchase a home. You should consult your local Realtor and mortgage professional so that together you can choose the best options.
MORTGAGE INSURANCE AKA PMI OR MMI: An insurance premium paid by the homeowner for the benefit of the lender when there is less than 20% equity in the home.
REFUNDABLE TAX CREDITS: A dollar for dollar credit on your tax bill. Can usually be used to pay your tax bill rather than with your own dollars. Any unused portion is refunded to the taxpayer.
Purchase Money Loan: The mortgage that was originated at the time of, and for the purpose of, buying the property.
Refinance: A mortgage that was originated after the purchase of a property for the purpose of changing the rate and terms of the loan.
Cash Out Refinance: A mortgage that was originated after the purchase of a property where the homeowner borrowed against their home in exchange for cash.
Subprime Mortgage: A loan made to a risky borrower in exchange for a higher interest rate and usually less favorable terms.
Equity: The value of the property beyond the amount of the mortgage debt.
Short Sale: A hardship sale of property where the mortgage debt is higher than the value of the property and in order to sell, the owner needs permission from their lender to forgive a portion of the mortgage debt.
Foreclosure: A property that was taken back by the lender for non-payment.
REO: A term used by lenders for a foreclosed property, which refers to the lender’s portfolio of Real Estate Owned.
Foreclosure Process: Typically, a 4-6 month process that is required by law, which allows the owner time to bring the payments current or pay the loan off before the lender takes possession.
NOD (Notice of Default): The beginning of the foreclosure process. The homeowner now has a minimum of 90 days to bring the loan current.
First Trust Deed: A recorded document between the borrower and the lender which states that in the event that the borrower defaults, the lender will take the property back. The first recorded trust deed has priority over subsequent trust deeds.
Second Trust Deed: A subsequent trust deed that secures a second loan against the property. This trust deed would have priority over any other trust deed except for the first.
Amortization: The reduction of a debt by periodic payments i.e. monthly mortgage payments.
Interest Only Loan: A loan where the required monthly payment only pays the accruing interest and does not pay down the loan balance.
Negative Amortization: A loan where the required monthly payment only pays a portion of the accruing interest and does not pay down the loan balance. The unpaid interest is added to the loan balance. The result is that your loan balance increases beyond what you originally borrowed.
Balloon Payment: The final payment of a loan where the entire remaining balance is due and payable at one time. This is necessary in an interest only or a negative amortization loan since no principal reduction was ever made. It is important to know whether your loan has a balloon payment or not.
Pre-Payment Penalty: A loan fee that is charged at the end of the loan when the borrower pays the loan off early. It is important to know whether your loan has a pre-payment penalty or not.
Fixed Rate Mortgage: A mortgage where the interest rate stays the same for the entire term of the loan.
ARM (Adjustable Rate Mortgage): A mortgage where the interest rate changes periodically throughout the term of the loan. There are many different types of ARMs. It is important that you understand how often and how much the rate can change.
This is just a partial list of the many terms that should be understood when deciding to purchase a home. You should consult your local Realtor and mortgage professional so that together you can choose the best options.
MORTGAGE INSURANCE AKA PMI OR MMI: An insurance premium paid by the homeowner for the benefit of the lender when there is less than 20% equity in the home.
REFUNDABLE TAX CREDITS: A dollar for dollar credit on your tax bill. Can usually be used to pay your tax bill rather than with your own dollars. Any unused portion is refunded to the taxpayer.
