PFIN Chapter 5
Anchoring
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, update daily, or 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
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 purchased property
Earnest money deposit
money pledged by a buyer to show good faith when making an offer to buy a home
Adjustment period
on adjustable rate mortgage, the period of time between rate or payment changes
Index rate
on an adjustable rate mortgage, the baseline index rate that captures interest rate movements
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
Interest rate cap
on an adjustable rate of mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan
Cooperative apartment (co
op) - an apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building
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
Property taxes
taxes levied by local governments on the assessed value of real estate fro the purpose of funding schools, law enforcement, and other local services
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
Foreclosures
the process whereby lenders attempt to recover loan balances form 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
Mortgage broker
a firm that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders; the broker merely takes loan applications 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 multi unit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project
Biweekly mortgage
a loan on which payments equal to half the regular monthly payment these are made every two 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's owed
Conventional mortgage
a mortgage offered by a lender who assumes all the risk of loss; typically requires a downpayment of at least 20 percent 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 market 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 homebuyers who have very little money available for a down payment and closing costs
Convertible ARM
an adjustable rate mortgage loan that allows borrowers to convert form an adjustable rate to a fixed rate loan, usually at 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 five to seven 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
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 than this value 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 percent
Mortgage points
fees (one point equals 1 percent 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
Bydown
financing made available by a builder or seller to a potential new home buyer at well below market interest rate, 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
VA loan guarantee
guarantee offered by the U.S. Veterans administration to lenders who make qualified mortgage loans to eligible veterans of the U.S. armed forces and their unmarried surviving spouses
Homeowner's insurance
insurance that is required by mortgage lenders and covers the replacement value of a home and its contents
Negative amortization
when the principal balance on a mortgage loan increases because the monthly loan payment is lower that the amount of monthly interest being charged; some ARMs are subject to this undesirable condition