Glossary of Terms for Home Buyers

Agent – acts on behalf of another, representing that person’s interests and serving as an intermediary.

Amortization – a method of equalizing the monthly mortgage payments over the life of the loan, even though the proportion of principal to interest changes over time.  In the early part of the loan, principal repayment is very small and interest repayment very high; at the end of the loan, that relationship is reversed.

Annual Percentage Rate (APR) – the actual finance charge for a loan, including points and loan fees in addition to the stated interest rate.

Appraisal – an expert judgment of the value or worth of a property.

Adjustable Rate Mortgage (ARM) – interest rates on this type of mortgage are periodically adjusted up or down, depending on a specified financial index.

Assessed Value – the value placed on property by a municipality for purposes of levying taxes.  It may differ widely from appraised or market value.

Broker – a real estate professional who has a higher level of training than an agent. Generally, this is one who is the legal representative or proprietor of the office.

Cap – limit on how much the interest rate can change in an ARM.

Commission – fee (usually a percentage of total transaction) paid to an agent or broker for services performed.

Condominium (Condo) – type of real estate ownership where the owner has title to a specific unit and shared interest in common areas.

Contingency – a condition in a contract that must be met for the contract to be binding.

Contract – binding legal agreement between two or more parties that delineates the conditions for the exchange of value (for example: money exchanged for title to property).

Deed – legal document that formally conveys ownership of property from Seller to Buyer.

Down Payment – percentage of the purchase price that the Buyer must pay in cash and may not borrow from the lender.

Earnest Money – a large deposit paid when the sale contract is signed before the closing.

Equity – the value of the property actually owned by the homeowner: purchase price plus appreciation plus improvements, less mortgages and liens.

Federal Home Loan Mortgage Corporation (FHLMC,  called “Freddie Mac”) – privately owned corporation created by Congress that buys mortgage notes from local lenders and is responsible for the guidelines a majority of lenders use to qualify borrowers.

Federal National Mortgage Association (FNMA, called “Fannie Mae”) – privately owned corporation created by Congress that buys mortgage notes from local lenders and is responsible for the guidelines a majority of lenders use to qualify borrowers.

Finance Charge – the total cost, including all fees, points and interest payments a borrower pays to obtain credit.

Fixed Rate Mortgage – interest rates on this type of mortgage remain the same over the life of the loan term. Compare to “Adjustable Rate Mortgage.”

Fixture – a recognizable entity (such as a toilet bowl, kitchen cabinet or light unit) that is permanently attached to property and belongs to the property when it is sold.

Hazard Insurance – compensates for property damage from specified hazards such as fire and wind.  More complete coverage is given by all-risk homeowner’s insurance.

Home Inspection Report – prepared by a qualified inspector, it evaluates a property’s structural and mechanical systems.

HUD-1 – a precise breakdown of closing costs for both Sellers and Buyers. (Also known as Settlement Statement).

Interest – the cost of borrowing money, usually expressed as a percentage over time.

Lien – a security claim on property until a debt is satisfied.

Listing Contract – agreement whereby an owner engages a real estate agent for a specified period to sell property, for which sale the agent receives a commission.

Market Price – the actual price at which a property sold.

Market Value – the price that is established by present economic conditions, locations and general trends.

Metropolitan Regional Information System (MRIS) – a system that provides to its members detailed information about properties for sale throughout the Washington Metropolitan area.

Mortgage – security claim by a lender against property until the debt is paid.

Negative Amortization – when monthly payments aren’t enough to cover interest costs, they are added to the principal balance, and you may end up owing more than when you started.

Origination Fee – application fee(s) for processing a proposed mortgage loan.

PITI – principal, interest, taxes, and insurance, forming the basis for monthly mortgage payments.

Point – one percent of the loan principal. Charged in addition to interest and fees.

Prepayment Penalty – a fee paid by a borrower who pays off the loan before it is due.

Prequalification – informal estimate of how much financing a potential borrower might expect to obtain, done before paying substantial loan application fees.

Principal – one of the parties to a contract; or the amount of money borrowed for which interest is charged.

Prorate – divide or assess proportionately.

Realtor(R) – a member of the National Association of Realtors(R).

Settlement – all financial transactions.

Time Is of the Essence–a legal theory that when applied makes a timeframe or timeframes absolute.  Violation of a stated timeframe under this theory is a breach of the contract term which constitutes a breach of the contract by the party violating that time frame.

Title–document that indicates ownership of a specific property.

Title Insurance–protects against loss from legal defects in the title.

Title Search–detailed examination of the entire document history of a property title to make sure there are no legal encumbrances.

Types of Ownership–There are four types of ownership. They are:

a. Sole Ownership – Only one person owns the property.

b. Tenants in Common – Two or more persons have an undivided ownership in the property. The percentage of ownership need not be equal; each party has a right to sell his/her interest and upon the death of any of the owners that owner’s interest in the property goes to his heirs.

c. Joint Tenants – Ownership taken by two or more persons at the same time in equal percentages with an undivided right to possession.  If one owner dies, his or her interest automatically goes to the remaining owner(s).

d. Tenants by the Entireties – Owners are husband and wife and together they hold title to the property with a right of survivorship.  Upon the death of either, the survivor takes sole ownership to the exclusion of the deceased spouse’s heirs.