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Definitions of mortgage
terms
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| Negative amortization |
A gradual
increase in mortgage debt that happens when the monthly payment does
not cover the entire principal and interest due. The shortfall is
added to the remaining balance to create "negative" amortization. |
| No-doc or low-doc loan |
These no-documentation or low-documentation loans are designed
for the entrepreneur or self-employed, for recent immigrants with
money in foreign countries or for borrowers who cannot or choose not
to reveal information about their incomes. You need a substantial
down
payment, excellent credit history and will usually pay a higher
interest rate. |
| Note |
The
document giving evidence of mortgage indebtedness, including the amount
and terms of repayment. |
| Origination fee |
A fee
paid to a lender for processing a loan application. |
| Owner financing |
A transaction
in which the seller of a house provides all or part of the financing.
Sellers may provide financing because they need to sell the property
right away or they are having difficulty selling the house and want
to provide financing as an incentive to a buyer. |
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| Periodic rate cap |
In
an adjustable-rate
mortgage (ARM), it limits how much an interest rate can increase
or decrease during any one adjustment period. See caps. |
| PITI |
Stands for principal, interest, taxes, and insurance, which
are the usual components of a monthly mortgage payment. |
| PITI reserves |
A cash
amount that a home buyer must have on hand after making a down
payment and paying all closing
costs. The reserves required by the lender must equal the amount
a home buyer would pay for PITI for a specified number of months. |
| Planned Unit Development
(PUD) |
A type
of real estate project that gives each unit owner title to a residential
lot and building and a nonexclusive easement
allowing access to the project's common areas. See common
area assessment. |
| Plat |
A map
that shows a parcel of land and how it is subdivided into individual
lots. Plat maps also show the locations of streets and easements. |
| PMI |
See
private mortgage
insurance. |
| Points |
A point
equals 1 percent of a mortgage loan. Lenders charge points as a way
to make a profit. Borrowers may pay discount
points to reduce the loan interest rate. Buyers are prohibited
from paying points on HUD or VA guaranteed loans. On a conventional
mortgage, points may be paid by either buyer or seller or split
between them. Within limits, points are usually tax deductible. Also
see interest
tax deduction. |
| Pre-approval |
This process goes a step further than pre-qualification.
It means the lender has contacted the borrower's employer, bank and
other places to verify all claims of earnings and assets. In return,
the borrower receives a letter stating the lender is willing to grant
a mortgage for a specified amount, within a limited period of time. |
| Prepayment penalty |
A fee
imposed by certain lenders if the first
mortgage is paid off early. |
| Prepayment plan |
Similar to a biweekly
mortgage, but operated by a third party. In it, the borrower pays
to the third party half the monthly mortgage payment every two weeks.
At the end of the year, the plan operators typically take the extra
money that results from the process and send lump sum payments to
the participants' lenders. Instead of 12 monthly payments of $665,
or $7,980 a year, on the 30-year mortgage, the borrower would make
26 biweekly payments of $332.50, or pay $8,645 annually. As a result,
total interest would shrink by $34,130 and the loan term would shorten
to less than 24 years. |
| Pre-qualification |
An
early evaluation by a lender of a potential home buyer's credit
report plus earnings, savings and debt information. The home buyer
gets a nonbinding estimate of the mortgage amount the borrower would
qualify for, or how much house the borrower can afford. Buyers who
pre-qualify can go a step further and seek pre-approval. |
| Private mortgage insurance, or PMI |
Insurance that protects mortgage lenders against default on
loans by providing a way for mortgage companies to recoup the costs
of foreclosure.
PMI is usually required if the down payment is less than 20 percent
of the sale price. Home buyers pay for the coverage in monthly installments.
PMI is usually terminated when the home buyer has built up 20 percent
equity
in the property. |
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| Quit claim deed |
The
formal document by which a claim in property is denied. Often used
to clear a cloud
on title. |
| Radon |
A radioactive
gas found in some homes that in sufficient concentrations can cause
health problems. Many home
inspections check for radon. |
| Rate lock |
A commitment
issued by a lender to a home buyer or to the mortgage
broker guaranteeing a specific interest rate for a specified amount
of time. See also lock. |
| Real estate agent |
A person
licensed to negotiate and transact the sale of real estate on behalf
of the property owner. |
| Real Estate Settlement Procedures Act (RESPA) |
A consumer
protection law that requires lenders to give home buyers advance notice
of closing
costs, which are payable at the closing
or settlement meeting. |
| RealtorŪ |
A real
estate broker or an associate who holds active membership in a local
real estate board that is affiliated with the National Association
of Realtors. |
| Refinancing |
Securing a new loan in order to pay off the existing mortgage
or to gain access to the existing equity
in the home. |
| Reliction |
An
increase in the amount of land that occurs when a river or sea permanently
withdraws. |
| Restrictive covenant |
A clause
in a deed that
restricts the use of property for a period of time. |
| Roll-in loans |
A refinance
loan that rolls any closing
costs or fees into the loan. These programs best serve people
who have a reasonable amount of equity,
want to reduce their overall interest expense and plan to stay in
their homes. Most refinance programs also cap the allowable LTV
at 97 percent, which means some borrowers won't have the option of
rolling their costs in no matter what. |
| Rural Housing Service (RHS) |
This agency of the U.S. Department of Agriculture provides
financing to farmers and other qualified borrowers buying property
in rural areas who are unable to obtain loans elsewhere. It offers
low-interest-rate loans with no down payment to borrowers with low-to-moderate
incomes who live in rural areas or small towns. |
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| Sale agreement |
A written
contract signed by the buyer and the seller of a house stating the
terms and conditions under which the property will be sold. |
| Second mortgage |
A mortgage
on property that has a lien position
behind the first
mortgage. |
| Secondary mortgage market |
The
buying and selling of existing mortgages. |
| Servicer |
An
organization that collects monthly mortgage principal and interest
payments from home owners and manages escrow
accounts for paying taxes and homeowners' insurance premiums. The
servicer often services mortgages that have been purchased by an investor
in the secondary mortgage
market. |
| Settlement |
See
closing. |
| Subprime mortgage |
A mortgage
granted to a borrower considered subprime, that is, a person with
a less-than-perfect credit
report. Subprime borrowers have either missed payments on a debt
or have been late with payments. Lenders charge a higher interest
rate to compensate for potential losses from customers who may run
into trouble or default. |
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