Real Estate

Foreclosure

A borrower typically cannot make scheduled payments and the lender repossesses the property in an effort to recover the loan balance owed. This appears on the homeowner's credit history.

Condominiums (condos)

A form of direct ownership of an individual unit in a multiunit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project. These are housing units that are contained within a development area in which you own your actual unit and a share of everything else in the development (lobby, parking areas, land, and the like, which are known as common areas). Condominiums are a less-expensive form of housing than a single-family home. For this reason, some people mistakenly view them as good starter houses. Unfortunately, condos generally don't increase in value as rapidly as single-family houses do, because the demand for them is lower than the demand for houses. And because condos are far easier for builders to develop than single-family homes, the supply of condos often exceeds the demand for them.

Lien

A legal claim against a property for the purpose of securing payment for work performed and money owed on account of loans, judgments, or claims. Liens are encumbrances that must be paid off before a property can be sold or title can transfer to a subsequent buyer. The liens that are a matter of public record on a property for sale appear on a property's preliminary report.

Down payment

A portion of the full purchase price provided by the purchaser when a house or other major asset is purchased; often called equity

Mortgage points

Fees (one point equals 1% of the amount borrowed) charged by lenders at the time they grant a mortgage loan; they are related to the lender's supply of loanable funds and the demand for mortgages. Lenders typically use points as an alternative way of charging interest on their loans. For example, a lender might be willing to give you a 5% rather than a 6% mortgage if you're willing to pay more points; that is, you choose between a 6% mortgage rate with 1 point or a 5% mortgage rate with 3 points. If you choose the 5% loan, you'll pay a lot more at closing (although the amount of interest paid over the life of the mortgage may be considerably less).

Equity

In the real estate world, equity refers to the difference between your home's market value and what you owe on it. For example, if your home is worth $250,000 and you have an outstanding mortgage of $170,000, your equity is $80,000.

Mortgage life insurance

Insurance guaranteeing that the lender will receive its money in the event that the borrower meets an untimely death. This type of insurance is probably not worth your money. Mortgage life insurance is relatively expensive compared to low-cost, high-quality term life insurance.

15-year mortgage

Mortgage loans in the US are typically repaid over a 15- or 30-year time span. Almost all mortgages require monthly payments. The interest rate is typically a little bit lower on a 15-year mortgage versus a 30-year mortgage because shorter-term loans are a little less risky for lenders. Of course, monthly payments will be higher for a 15-year loan. Interests rates can vary greatly, usually somewhere between 4% and 12.5%.

Bungalow

Noun A one-storied house with a low-pitched roof; a house having one and a half stories and usually a front porch

Prepayment penalty

One advantage of most mortgages is that you can make additional payments to pay the loan off faster if you have the inclination and the money to do so. A prepayment penalty discourages you from doing this by penalizing you for early payments. Some states prohibit lenders from penalizing people who prepay their loans. Avoid mortgages that penalize prepayment.

Annual Percentage Rate (APR)

When figuring out your mortgage interest rate, the base rate is the actual rate used to calculate your payment. The APR is the total cost of taking out the loan, factored out over the life of the loan and taking into account any fees you pay, like appraisal fees and credit reports.

Adjustable-Rate Mortgage (ARM)

With an adjustable-rate mortgage, the interest rate is a fixed for a specified amount of time and then is reset periodically depending on a floating interest rate determined by an index. Caps limit the amount that the interest rate can fluctuate. Before you agree to an ARM, be sure that you can afford the highest payments that would result if the interest rate on your mortgage increased to the maximum allowed.

Fixed-rate mortgage

With this type of mortgage, you lock into an interest rate (for example, 7.5%), and it never changes during the life (term) of your 15- or 30-year mortgage. Your mortgage payment is the same amount each and every month.

Property tax

Yearly tax (paid by the owner) assessed on a home. Property tax annually averages 1 to 2 percent of a home's value, but property tax rates vary widely from state to state.

Encumbrance

A right or interest someone else holds in a homeowner's property that affects its title or limits its use. A mortgage, for example, is a money encumbrance that affects a home's title by making it security for repayment of the loan.

Closing costs

All expenses (including mortgage points) that borrowers ordinarily pay when a mortgage loan is closed and they receive title to the purchased property.

Points

Also known as a loan's origination fee, points are interest charges paid upfront when you close on your loan. Points are actually a percentage of your total loan amount (one point is equal to 1% of the loan amount). For a $100,000 loan, one point costs you $1,000. Generally speaking, the more points that a loan has, the lower its interest rate should be. All the points that you pay on a purchase mortgage are deductible in the year that you pay them.

Private Mortgage Insurance (PMI)

An insurance policy that protects the mortgage lender from loss in the event the borrower defaults on the loan; typically required by lenders when the down payment is less than 20%. The smaller the down payment, the more likely a home buyer is to default on a loan. PMI can add hundreds of dollars per year to your loan costs. After the equity of your property increased to 20%, you no longer need the insurance. Don't confuse this insurance with mortgage life insurance.

Debt-to-income ratio

Before you buy a home, you should determine what your price range is. Lenders generally figure that you shouldn't spend more than 33 - 40% of your monthly income for your housing costs. The debt-to-income ratio measure your future monthly housing expenses - which include your proposed mortgage payment (debt), property tax, and insurance - in relation to your monthly income.

Cooperatives (co-ops)

Cooperatives are apartment buildings where you own a share of a corporation whose main asset is the building that you live in. In high-cost areas, cooperatives (like their cousins, condominiums and townhouses) are cheaper alternatives to buying single-family houses. Unfortunately, cooperatives also resemble their cousins in that they generally lag behind single-family homes in terms of appreciation. Co-ops are also, as a rule, harder to sell and obtain loans for than condominiums.

Front-End Ratio

Noun The front-end ratio, also known as the mortgage-to-income ratio, is a ratio that indicates what portion of an individual's income is allocated to mortgage payments. The front-end ratio is calculated by dividing an individual's anticipated monthly mortgage payment by his/her monthly gross income. The mortgage payment generally consists of principal, interest, taxes, and mortgage insurance (PITI). Lenders use the front-end ratio in conjunction with the back-end ratio to determine how much to lend. Lenders prefer a front-end ratio of 28% or less for most loans and 31% or less for Federal Housing Administration (FHA) loans. Higher ratios indicate an increased risk of default.

Negative amortization

Occurs when an outstanding mortgage balance increases despite the fact that the borrower is making the required monthly payments. Negative amortization occurs with adjustable-rate mortgages that cap the increase in the monthly loan payment but don't cap the interest rate. Therefore, the monthly payments don't cover all the interest that the borrower actually owes. Avoid loans with this feature!

Negative equity

Owing more on a home mortgage than the home is actually worth

Real estate short sale

Sale of real estate property in which the proceeds are less than the balance owed on a loan secured by the property sold. This may be viewed as a negotiated effort to mitigate the losses of the mortgage lender when a property could go into foreclosure. This is usually faster and cheaper for the homeowner than a foreclosure.

Cash to close

The amount of money you'll need to show up with at the closing. On the day you actually sign the documents to officially buy a house, you'll have to pay the closing costs.

Loan-to-value ratio

The maximum percentage of the value of a property that the lender is willing to loan. For example, if the loan-to-value ratio is 80%, the buyer will have to come up with a down payment equal to the remaining 20% (Gitman, page 160).

Single-family homes

These are the most popular type of housing choice. They can be stand-alone homes on their own legally defined lots or row houses or townhouses that share a common wall. As a rule, single-family homes offer buyers privacy, prestige, pride of ownership, and maximum property control.

Home Equity Loan

This is another name for a second mortgage. With this type of loan, you borrow against the equity in your house. If used wisely, a home equity loan can help people pay off high-interest consumer debt, which is usually at a higher interest rate than a home equity loan and isn't tax-deductible; or a home equity loan can be used for other short-term needs, such as payments on a remodeling project.

Escrow

This is the holding of important documents and money (related to the purchase/sale of a property) by a neutral third party (the escrow officer) prior to the transaction's close. "Closing escrow" means that the deal is completed. Among other duties, the escrow officer makes sure that the previous mortgage is paid off, your loan is funded, and the real estate agents are paid.

Promissory note

This note is the evidence of your debt, an IOU that specifies exactly how much money your borrowed as well as the terms and conditions under which you promise to repay it.

Townhouses

Townhouses is the name for a row (or attached) home. Townhouses are cheaper than single-family homes because they use common walls and roofs, thus saving land. In terms of investment appreciation potential, townhouses lie somewhere between single-family homes and condominiums.