Prescott Arizona Homes Glossary

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Real Estate Glossary and Mortgage Terminology

Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that changes over time in line with movements in the index. ARMs are also referred to as AMLs (adjustable mortgage loans) or VRMs (variable rate mortgages).
Adjustment Period: The length of time between interest rate changes on an ARM. For example, a loan with an adjustment period of one year is called a one-year ARM, which means that the interest rate can change once a year.
Amortization: Repayment of a loan in installments of principal and interest, rather than interest-only payments.
Annual Percentage Rate (APR): The total finance charge (interest, loan fees, and points) expressed as a percentage of the loan amount.
Appraisal/Appraised Value: An opinion of the market value of a home expressed by a Certified Real Estate Appraiser.
Assumption of Mortgage: A buyer's agreement to assume the liability under an existing note that is secured by a mortgage or deed of trust. The lender must approve the buyer in order to release the original borrower (usually the seller) from liability.
Balloon Payment: A lump sum principal payment due at the end of some mortgages or other long-term loans.
Cap: The limit on how much an interest rate or monthly payment can change, either at each adjustment or over the life of the mortgage.
CC&R's: Covenants, conditions and restrictions. A document that controls the use, requirements and restrictions of a property.
Certificate of Reasonable Value (CRV): A document that establishes the maximum value and loan amount for a VA guaranteed mortgage.
Closing Statement: The financial disclosure statement that accounts for all of the funds received and expected at closing, including deposits for taxes, hazard insurance, and mortgage insurance.
Condominium: A form of real estate ownership where the owner receives title to a particular unit and has a proportionate interest in certain common areas. The unit itself is generally a separately owned space whose interior surfaces (walls, floors and ceilings) serve as its boundaries. (Sometimes called "Paint-to-Paint.")
Contingency: A condition that must be satisfied before a contract is binding. For instance, a sales agreement may be contingent upon the buyer obtaining financing.
Conventional Mortgage: A loan not guaranteed, insured or made by the federal or state government.
Conversion Clause: A provision in some ARM's that enables you to change an ARM to a fixed-rate loan, usually after the first adjustment period. The new fixed rate is generally set at the prevailing interest rate for fixed-rate mortgages. This conversion feature may require additional funds.
Cooperative: A form of multiple ownership in which a corporation or business trust entity holds title to a property and grants occupancy rights to shareholders by means of proprietary leases or similar arrangements. (Also called a "Co-op.")
Deed: A legal document conveying ownership of property. Should be recorded by the county recorder.
Debt-To-Income (DTI) Ratio: The ratio of monthly debt payments to monthly gross income. Lenders use a housing DTI ratio (house payment divided by monthly income) and a total DTI ratio (total debt payments including the house payment, divided by monthly income) to determine whether a borrower's income qualifies him or her for a mortgage.
Due-On-Sale Clause: A clause that requires full payment of a mortgage or deed of trust when the secured property changes ownership.
Earnest Money: The portion of the down payment delivered to the seller or escrow agent by the purchaser with a written offer as evidence of good faith.
Escrow: A procedure in which a third party acts as a stakeholder for both the buyer and the seller, carrying out both parties' instructions and assuming responsibility for handling all of the paperwork and distribution of funds.
FHA Loan: A loan insured by the Federal Housing Administration (of the Department of Housing and Urban Development).
Federal National Mortgage Association (FNMA): Popularly known as Fannie Mae. A privately owned corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by the VA, as well as conventional home mortgages.
Fee Simple: An estate in which the owner has unrestricted power to dispose of the property as he wishes, including leaving by will or inheritance. It is the greatest interest a person can have in real estate.
Finance Charge: The total cost borrower must pay, directly or indirectly, to obtain credit according to Regulation Z.
Fixed-Rate Mortgage (FRM): A loan on which the interest rate and monthly payment do not change.
Graduated Payment Mortgage: A residential mortgage with monthly payments that start at a low level and increase at a pre-determined rate.
Hazard Insurance: A policy that protects against damage to a property caused by fire, wind or other hazards including acts of God.
Home Inspection Report: A qualified inspector's report on a property's overall condition. The report usually includes an evaluation of both the structure and mechanical systems.
Home Warranty Plan: Protection against failure of mechanical systems with the property. Generally includes plumbing, electrical, heating systems and installed appliances.
Impound Account: An account established by a lender to collect a borrower's property tax and insurance payments.
Index: A measure of interest rate changes use to determine changes in an ARM's interest rate over the term of the loan.
Joint Tenancy: An equal undivided ownership of property by two or more persons. Upon the death of any owner, the survivors take the decedent's interest in the property.
Lien: A legal hold or claim on property as security for a debt or charge.
Loan-To-Value Ratio: The relationship between the amount of the mortgage and the appraised value of the property, expressed as a percentage of the appraised value.
Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Mortgage Interest Deduction: The ability of mortgage borrowers to deduct the interest paid on a home loan for purposes of federal and state income taxes.
Mortgage Life Insurance: A type of term life insurance often purchased by homebuyers. The coverage decreases as the mortgage balance declines. If the borrower dies while the policy is in force, the mortgage debt is automatically covered by insurance proceeds.
Negative Amortization: Negative amortization occurs when the monthly payments fail to cover the monthly interest cost. The interest that isn't covered is added to the unpaid principal balance, which means that even after several payments you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that aren't high enough to cover the interest.
Origination Fee: A fee or charge for work involved in evaluating, preparing, and submitting a proposed mortgage loan. The fee is limited to 1 percent for FHA and VA loans.
PITI: Principal, Interest, Taxes and Insurance.
Planned Unit Development (PUD): A zoning designation for property developed at the same or slightly greater overall density than conventional development, sometimes with improvements clustered between open, common areas. Uses may be residential, commercial or industrial.
Point: An amount equal to 1 percent of the principal amount of the investment or note. The lender assesses loan discount points at closing to increase the yield on the mortgage to a position competitive with other types of investments.
Prepayment Penalty: A fee charged to a borrower who pays a loan before it is due. Not allowed for FHA or VA loans.
Private Mortgage Insurance (PMI): Insurance written by a private company protecting the lender against loss if the borrower defaults on the mortgage.
Purchase Agreement: A written document in which the purchaser agrees to buy certain real estate and the seller agrees to sell under stated terms and conditions. Also called a sales contract, earnest money contract, or agreement for sale.
Realtor: A real estate broker or associate (agent) active in a local real estate board affiliated with the National Association of Realtors. Not all licensees are Realtors.
Regulation Z: The set of rules governing consumer lending issued by the Federal Reserve Board of Governors in accordance with the Consumer Protection Act.
Tenancy in Common: A type of joint ownership of property by two or more entities.
Title: A legal document establishing the right of ownership of a property.
Title Insurance Policy: A policy that protects the purchaser, mortgagee or other party against losses.
Underwriting: The process of evaluating a loan application to assure the lender that the buyer is qualified to secure the loan.
VA Loans: A loan made by a private lender that is partially guaranteed by the Veterans Administration.
These definitions are general in nature and not intended to be complete. Please seek legal counsel, tax advice and/or lender information from the appropriate professional sources.


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