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Mortgage Basics - Glossary of Terms

Adjustable Rate Mortgage (ARM) — A mortgage on which the interest rate charged may change, up or down, according to a predetermined index. 

Amortization — Reduction of debt in installments of principal and interest, rather than interest-only payments. 

Annual Percentage Rate (APR) — --Required to be furnished to the borrower by Federal law, the APR has no bearing upon the homebuyer’s monthly payment and is typically somewhat higher than the stated mortgage rate. 

Appreciation — An increased value of property. 

Closing Costs — Expenses incidental to a sale of real estate, such as loan fees, title fees, appraisal fees, etc. 

Conventional Loan — A mortgage or deed of trust not obtained under a government-insured program. 

Credit Report — -A report on the past ability of a loan applicant to pay installment payments. 

Deed — Generally a conveyancing instrument given to pass title to property upon sale. 

Deposit — Money given by the buyer to the seller with an offer to purchase.  Shows good faith. Also called earnest money. 

Equity — The market value of real property, less the amount of outstanding loans secured by the property. 

Escrow Account — An account set up by most lenders to which the borrower makes monthly payments for such obligations as real estate taxes, homeowner’s insurance and special assessments.  The lender disburses funds from these accounts for the borrower as bills come due. 

FHA (Federal Housing Administration)—A federal agency that insures first Mortgages, enabling lenders to make loans or loan a higher percentage of the sales price than they otherwise might. 

Grace Period—A period of time after the regular due date of a loan payment during which a late payment penalty is not charged. 

Index — Any ARM adjustments must be based on the movement of an independent index that is beyond the control of the lender and that can be easily verified by the borrower. 

Insurance — Lenders won’t let you close the deal on your home purchase if you don’t have home insurance, which covers your home and your personal property against losses from fire, theft, bad weather and other causes. 

Interest — 1) A share of right in some property. 2) Money charged for the use of money (principal). 

Interest Rate Cap — A limit on the maximum interest rate that can be charged during the life of an ARM or on the maximum rise allowed from one adjustment period to the next. 

Loan Processing — The work done by a lender from the time a homebuyer applies for a mortgage to the time the loan is approved. 

Mortgage — The instrument by which real estate is pledged as security for repayment of a loan. 

Mortgagee — The party lending the money. 

Mortgagor — The party who borrows the money. 

Note — A unilateral agreement containing an express and absolute promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.  Usually provides for interest and, concerning real property, is secured by a mortgage or trust deed. 

Payment Cap — A limit of the amount of monthly principal and interest payment can change during the term of an ARM—or from one adjustment period to the next. 

Point — One percent.  When referring to mortgages or deeds of trust, the term is used to describe the percentage of discount rather than interest (for which the word “percent” is used).  The points are paid by either buyer or seller or both. 

Principal — Amount of debt, not including interest.  The face value of a note, mortgage, etc. 

Taxes — The taxes are property taxes your community levies based on a percentage of the value of your home.  The tax is generally used to help finance the cost of running your community, say to build schools, roads, infrastructure and other needs. 

Title — The evidence one has of right to ownership and possession of land. 

Zoning — The division of a city or county by legislative or administrative regulation into areas (zoning), specifying the uses allowable for the real property in these areas