ADJUSTABLE RATE MORTGAGE (ARM): A mortgage with an interest rate that changes over time in line with movements in a financial index. ARMs can also be referred to as AMLs (adjustable mortgage loans) or VRMs (variable rate mortgages).
ADJUSTMENT PERIOD: The length of time between interest rate changes on an ARM. For example, a loan with an adjustment period of one year is called a one-year ARM, meaning that the interest rate can change once a year.
AMORTIZATION: Repayment of a loan in installments of principal and interest, rather than interest-only payments.
APPRAISAL: An estimate of the property’s value. An appraisal is requested by the buyers lender. In some cases, a lender can agree to waive the appraisal. The appraisal determines how much the lender will loan to the borrower.
ASSESSMENT VALUE: The value placed on a property for purposes of taxation.
ASSUMPTION OF MORTGAGE: A buyer’s agreement to assume the liability under an existing note that is secured by a mortgage or deed of trust. The lender must approve the buyer in order to release the original borrower (typically the seller) from liability.
BALLOON PAYMENT: A lump sum principal payment which is attached to a loan, mortgage, or a commercial loan. This payment is usually made towards the end of the loan period and is higher than what you might be paying towards the loan on a monthly basis.
BUY-DOWN: A permanent buy-down is prepaid interest that brings the note rate on the loan down to a lower permanent rate. A temporary buy-down is prepaid interest that lowers the note rate temporarily on the loan, allowing the buyer to more readily qualify and increase payments as income grows.
CAP: The limit on how much an interest rate or monthly payment can change, either at each adjustment or over the life of a mortgage.
CASH RESERVE: The amount of the buyer’s liquid cash remaining after making the down payment and paying all closing costs.
CC&Rs or (COVENANTS, CONDITIONS and RESTRICTIONS): A recorded document that controls the use, requirements and restrictions of a property.
COMMISSION: An amount paid by the SELLER to the listing and buyers agent for handling the real estate transaction.
COMMITMENT PERIOD: The period of time during which a loan approval is valid.
CONTINGENCY: A condition that must be satisfied before a contract is binding. For example, a sales agreement or offer may be contingent upon the buyer obtaining financing.
CONVERSION CLAUSE: A provision in some ARMs that enables home buyers to change an ARM to a fixed rate mortgage, usually after the first adjustment period. The new fixed rate is generally set at the prevailing interest rate for fixed rate mortgages. This conversion feature may involve an extra charge.
CRB (or CERTIFIED RESIDENTIAL BROKER): To be certified, a broker must be a member of the National Association of Realtors®, have five years of experience as a licensed broker and have completed required Residential Division courses.
DEBT RATIO: The comparison of a buyer’s housing costs to their gross or net effective income and the comparison of a buyer’s total long-term debt to their gross or net effective income. The first ratio is the housing ration and the second is the total debt ratio.
DEED: A document which, when property executed and delivered, conveys title of real property.
DISCLOSURE: To make known or public. By law, a seller of real property must disclose facts which affect the value or desirability of the property.
DISCOUNT POINTS: A negotiable fee paid to the lender to secure financing to the buyer. Discount points are interest charges paid up front to reduce the interest rate on the loan over the life or a portion of the term.
DUE ON SALE CLAUSE: A clause that requires a full payment of a mortgage or deed of trust when the secured property changes ownership.
EARNEST MONEY DEPOSIT (EMD): A percentage taken from the total down payment delivered to the seller or escrow agent by the purchaser/buyer within 3 business days (unless otherwise agreed upon) of an offer being accepted.
ENCUMBRANCE: Anything that affects or limits the ownership of real property, such as mortgages, liens, easements or restrictions of any kind.
ESCROW: An unbiased 3rd party who acts as a stakeholder for both the buyer and the seller and carries out both parties’ instructions. Escrow assumes responsibility for handling the distribution of funds. An escrow fee, typically paid by the buyer, is charged by the title company to service the transaction.
EQUITY: The difference between what is owed on any loans/encumbrances on the home, and the sales price.
FIXED RATE MORTGAGE: A conventional loan with the same interest rate for the life of the loan.
FIXTURES: Personal property that is attached to real property and is legally treated as real property while it is attached – such as light fixtures, window treatments, and medicine cabinets.
FORECLOSURE: The legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
FULLY INDEXED RATE: The maximum interest rate on an ARM that can be reached at the first adjustment.
GIFT LETTER: A letter stating that an amount will be gifted to the buyer and that said amount is not to be repaid.
HOME WARRANTY PLAN: Protection against failure of mechanical systems within the property and usually includes a set service fee. This is separate from a home insurance policy.
INDEX: A measure of interest rate changes used to determine changes in an ARMs interest rate over the term of the loan.
INITIAL INTEREST RATE: The introductory interest rate on a loan, which signals that there may be rate adjustments later in the loan.
JUMBO LOANS: Mortgage loans that exceed the loan amounts acceptable for sale in a secondary market. Jumbos are packaged and sold differently to investors and have separate underwriting guidelines. In the count of Riverside, a loan over the amount of $715,000 is considered a jumbo loan.
LIST TO SALE RATIO: The ratio between the list price of a home and the amount the house actually sold for.
LOAN COMMITMENT: A written promise to make a loan for a specified amount on specified terms.
LOAN TO VALUE RATIO: The relationship between the amount of the mortgage and the appraised value of the property, typically expressed as a percentage of the appraised value.
MARGIN: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
MORTGAGE INSURANCE PREMIUM (MIP): The mortgage insurance required on FHA loans for the life of said loan. The MIP is either paid in cash at the time of closing or financed over the course of the loan.
MULTIPLE LISTING SERVICE (MLS): A multiple listing service (MLS) is a database established by cooperating real estate brokers to provide data about properties for sale. An MLS allows brokers to see one another’s listings of properties for sale with the goal of connecting homebuyers to sellers. Under this arrangement, both the listing and selling brokers benefit by consolidating and sharing information and by sharing commissions.
ORIGINATION FEE: A fee or charge for work involved in evaluating, preparing, and submitting a proposed mortgage loan. The fee is limited to 1% for FHA and VA loans.
PITI: The term for a mortgage payment that includes principal, interest, taxes and insurance.
POINTS: One point is equal to 1% of the principal amount of the investment or note. (So 2 points would be equal to 2%, 3 points is equal to 3% and so forth).
PRE-APPROVAL: When a borrower has completed a loan application and provided debt, income and savings documentation which an underwriter has reviewed and approved. This is not the same as a Pre-Qualification letter.
PREPAYMENT PENALTY OR CLAUSE: A fee charged to a borrower who pays a loan in full before the stated due date.
PRIVATE MORTGAGE INSURANCE (PMI): Insurance written by private companies to protect the lender against loss if the borrower defaults on the mortgage. PMI is often required on mortgage loans in which less than 20% has been put towards a down payment. Depending on the conditions of the mortgage, the borrower may request cancellation of PMI when equity in the property reaches 20%.
PURCHASE AGREEMENT: A written document in which the purchase agrees to buy certain real estate and the seller agrees to sell under stated terms and conditions. Also called a sales contract, earnest money contract or agreement for sale.
RATE GAP: The difference between the current rate and the rate to which it could adjust on an ARM.
RECORDING FEE: Charged by the County Clerk to record documents in the public records.
SHORT SALE: The sale of a home for less than the balance remaining on the homeowner’s mortgage.
