PFIN Chapter 5

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

property tax

Taxes levied by local governments on the assessed value of real estate for the purpose of funding schools, law enforcement, and other local services

negative amortization

When the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition

anchor

A behavioral bias in which an individual tends to allow an initial estimate (of value or price) to dominate the subsequent assessment (of value or price) regardless of new information to the contrary

contingency clause

A clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice

Multiple Listing Service (MLS)

A comprehensive listing, updated daily, of properties for sale in a given community or metropolitan area; includes a brief description of each property with a photo and its asking price but can be accessed only by realtors who work for an MLS member

Real Estate Settlement Procedures Act (RESPA)

A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers

mortgage broker

A firm that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders; the broker merely takes loan application and then finds lenders willing to grant the mortgage loans under the desired terms

mortgage banker

A firm that solicits borrowers, originates primarily government-insured and government-guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells

condominium (condo)

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

VA loan guarantee

A guarantee offered by the US Veterans Administration to lenders who make qualified mortgage loans to eligible veterans of the US Armed Forces and their unmarried surviving spouses

biweekly mortgage

A loan on which payments equal to half the regular monthly payment that are made every 2 weeks

mortgage loan

A loan secured by the property; If the borrower defaults, the lender has the legal right to liquidate the property to recover the funds it is owed

conventional mortgage

A mortgage offered by a lender who assumes all the risk of loss; typically requires a down payment of at least 20% of the value of the mortgaged property

adjustable rate mortgage (ARM)

A mortgage on which the rate of interest, and therefore the size of the monthly payment, is adjusted based on marker interest rate movements

interest-only mortgage

A mortgage that requires the borrower to pay only interest; typically used to finance the purchase of more expensive properties

graduated-payment mortgage

A mortgage that starts with unusually low payments that rise over several years to a fixed payment

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

purchase option

A price specified in a lease at which the lessee can buy the car at the end of the lease term

FHA mortgage insurance

A program under which the Federal Housing Administration (FHA) offers lenders mortgage insurance on loans having a high loan-to-value ratio; its intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs

PITI

Acronym that refers to a mortgage payment consisting of principal, interest, property taxes, and homeowner's insurance

closing costs

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

convertible ARM

An adjustable-rate mortgage loan that allows borrowers to convert from an adjustable-rate to a fixed-rate loan, usually any time between the 13th and the 60th month

two-step ARM

An adjustable-rate mortgage with just two interest rates: one for the first 5 to 7 years of the loan, and a higher one for the remaining term of the loan

sales contract

An agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract legally binds them to its terms

cooperative apartment (co-op)

An apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building

lease

An arrangement in which the lessee receives the use of a car (or other asset) in exchange for making monthly lease payments over a specified period

open-end (finance) lease

An automobile lease under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less at the end of the lease, the lessee must pay the difference

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%

buydown

Financing made available by a builder or seller to a potential new-home buyer at well below market interest rates, often only for a short period

growing-equity mortgage

Fixed-rate mortgage with payments that increase over a specific period. Extra funds are applied to the principal so that the loan is paid off more quickly

homeowner's insurance

Insurance that is required by mortgage lenders and covers the replacement value of a home and its contents

earnest money deposit

Money pledged by a buyer to show good faith when making an offer to buy a home

index rate

On an adjustable-rate mortgage, the baseline index rate that captures interest rate movements

interest rate cap

On an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan

payment cap

On an adjustable-rate mortgage, the limit on the monthly payment increase that may result from a rate adjustment

margin

On an adjustable-rate mortgage, the percentage points a lender adds to the index rate to determine the rate of interest

adjustment period

On an adjustable-rate mortgage, the period of time between rate or payment changes

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

money factor

The financing rate on a lease; similar to the interest rate on a loan

depreciation

The loss in the value of an asset such as an automobile that occurs over its period of ownership; calculated as the difference between the price initially paid and the subsequent sale price

loan-to-value ratio

The maximum percentage of the value of a property that the lender is willing to loan

closed-end lease

The most popular form of automobile lease; often called a walk-away lease, because at the end of its term the lessee simply turns in the car (assuming the preset mileage limit has not been exceeded and the car hasn't been abused

capitalized cost

The price of a car that is being leased

prequalification

The process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable for the home buyer

foreclosure

The process whereby lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral

rent ratio

The ratio of the average house price to the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest

residual value

The remaining value of a leased car at the end of the lease term

fixed-rate mortgage

The traditional type of mortgage in which both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan