Understanding the terms used throughout a real estate
transaction can almost seem like learning a whole new
language. We've created this handy glossary to help you
master the vocabulary of real estate.
Adjustable Rate Mortgage (ARM): A mortgage
with an interest rate that changes over time in line with
movements in a financial index. ARMs can also be
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 oneyear
ARM, meaning that the interest rate can change
once a year.
Amortization: Repayment of a loan in installments
of principal and interest, rather than interest-only
Appraisal: An estimate of the property's value.
Assessed Value: The value placed on a property for
purposes of taxation.
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
(typically the seller) from liability.
Balloon Payment: A lump sum principal payment
due at the end of some mortgages or other long-term
Buydown: A permanent buydown is pre-paid interest
that brings the note rate on the loan down to a lower,
permanent rate. A temporary buydown is pre-paid
interest that lowers the note rate temporarily on the
loan, allowing the buyer to more readily qualify and
increase payments as income grows.
Cap: The limit on how much an interest rate or monthly
payment can change, either at each adjustment or over
the life of a mortgage.
Cash Reserves: The amount of the buyer's liquid cash
remaining after making the down payment and paying
all closing costs.
CC&Rs or Covenants, Conditions and
Restrictions: A recorded document that controls the
use, requirements and restrictions of a property.
Commission: An amount paid by the seller to the
listing and selling Agent for handling the real estate
Commitment Period: The period of time during
which a loan approval is valid.
Condominium: A form of real estate ownership in
which the owner receives exclusive title to a particular
unit and shares ownership in certain common areas with
other unit owners. The unit itself is generally a separately
owned space whose interior surface (walls, floors and
ceiling) serve as its boundaries.
Contingency: A condition that must be satisfied before
a contract is binding. For example, a sales agreement
or offer may be contingent upon the buyer obtaining
Conversion Clause: A provision in some ARMs that
enables home buyers to change an ARM to a fixed rate
mortgage, 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 involve an extra charge.
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.
CRB or Certified Residential Broker: To be
certified, a broker must be a member of the National
Association of Realtors®, have five years of experience
as a licensed broker and have completed required
Residential Division courses.
Debt Ratios: The comparison of a buyer's housing
costs to his or her gross or net effective income and
the comparison of a buyer's total long-term debt to his
or her gross or net effective income. The first ratio is
the housing ratio and the second is the total debt ratio.
Deed: A document which, when properly executed and
delivered, conveys title of real property.
Disclosure: To make known or public. By law, a seller
of real property must disclose facts which affect the
value or desirability of the property.
Discount Points: A negotiable fee paid to the lender
to secure financing to the buyer. Discount points are
interest charges paid up-front to reduce the interest
rate on the loan over the life or a portion of the term.
Due-on-Sale Clause: A clause that requires a 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.
Easement: A right to use all or part of the land owned
by another for a specific purpose. For example, an
easement may entitle the holder to install and maintain
sewer or utility lines.
Encumbrance: Anything that affects or limits the
ownership of real property, such as mortgages, liens,
easements or restrictions of any kind.
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. An escrow fee, typically paid by the buyer, is
charged by the title company to service the transaction
and to escrow money and documents.
Equity: The difference between what is owed and the
amount for which the property could be sold.
FHA Loan: A loan insured by the Federal Housing
Administration (of the Department of Housing and
Federal Home Loan Mortgage Corporation
(FHLMC): Often referred to as 'Freddie Mac,' they
purchase loans from savings and loan lenders within the
Federal Home Loan Bank Board.
Federal National Mortgage Association
(FNMA): Popularly known as 'Fannie Mae,' they
purchase and sell residential mortgages insured by FHA
or guaranteed by the VA, as well as conventional home
Fee Simple: An estate in which the owner has
unrestricted power to dispose of the property as he or
she wishes, including leaving by will or inheritance.
Fixed Rate Mortgage: A conventional loan with the
same interest rate for the life of the loan.
Fixtures: Personal property that is attached to real
property and is legally treated as real property while it
is attached—such as light fixtures, window treatments
and medicine cabinets.
Fully Indexed Rate: The maximum interest rate on
an ARM that can be reached at the first adjustment.
Gift Letter: A letter from a relative stating that an
amount will be gifted to the buyer and that said amount
is not to be repaid.
Government National Mortgage Association
(GNMA): Known as 'Ginnie Mae,' a governmental
part of the secondary market that deals primarily with
recycling VA and FHA mortgages, particularly those that
are highly leveraged.
Graduated Payment Mortgage: A residential
mortgage with monthly payments that start at a low
level and increase at a predetermined rate.
Home Warranty Plan: Protection against failure
of mechanical systems within the property and usually
includes plumbing, electrical, heating and cooling systems
and installed appliances.
Index: A measure of interest rate changes used to
determine changes in an ARM's interest rate over the
term of the loan.
Initial Interest Rate: The introductory interest rate
on a loan, which signals that there may be rate adjustments
later in 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
Jumbo Loans: Mortgage loans that exceed the loan
amounts acceptable for sale in the secondary market.
Jumbos are packaged and sold differently to investors
and have separate underwriting guidelines.
Lien: A legal hold or claim on a property as security
for a debt or charge.
List-to-Sale Ratio: The ratio between the price at
what a property is listed and the amount for which it
is actually sold.
Loan Commitment: A written promise to make a
loan for a specified amount on specified terms.
Loan-to-Value Ratio: The relationship between the
amount of the mortgage and the appraised value of the
property, typically expressed as a percentage of the
Lock-in: The fixing of an interest rate or points at a
certain level, usually during the loan application process.
It is typically fixed for a specified amount of time, such
as 20 to 30 days or some other period of time determined
by the lender.
Margin: The number of percentage points the lender
adds to the index rate to calculate the ARM interest
rate at each adjustment.
Mortgage (Deed of Trust): A legal document that
provides security for repayment of a promissory note.
Mortgage Insurance Premium (MIP): The
mortgage insurance required on FHA loans for the life
of said loan. The MIP is either paid in cash at the time
of closing or financed over the course of the loan.
Multiple Listing Service: The pooling in a central
bureau of all properties for sale. The listings are held
individually by members of a group of real estate Brokers,
with the agreement that any member of the group may
sell the properties and the commission will be divided
between the Broker that sold the property and the
Broker who filed the listing.
Negative Amortization: Occurs when monthly
payments fail to cover the cost of the interest on a loan.
The interest that is not covered is added to the unpaid
principal balance, meaning that even after making several
payments the borrower could owe more than at the
beginning of the loan. Negative amortization may occur
when an ARM has a payment cap that results in monthly
payments that are not 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% for FHA and VA
PITI: The term for a mortgage payment that includes
principal (P), interest (I), taxes (T) and insurance (I).
Planned Unit Development (PUD): A zoning
designation for property developed at the same or
slightly greater overall density than conventional
development, often with improvements clustered between
open or common areas. Use may be residential,
commercial or industrial.
Point: An amount equal to 1% of the principal amount
of the investment or note.
Prepayment Penalty or Clause: A fee charged
to a borrower who pays a loan in full before the stated
Private Mortgage Insurance (PMI): Insurance
written by private companies to protect the lender
against loss if the borrower defaults on the mortgage.
PMI is often required on mortgage loans in which less
than 20% has been put forth for the down payment.
Depending on the conditions of the mortgage, the
borrower may request cancellation of PMI when equity
in the property reaches 20%.
Purchase Agreement: A written document in which
the purchaser agrees to buy a 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.
Rate Gap: The difference between the current rate
and the rate to which it could adjust on an ARM.
Realtor: A real estate Broker or Sales Associate active
in a local real estate board affiliated with the National
Association of Realtors.
Recording Fee: Charged by the County Clerk to
record documents in the public records.
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 persons with no right of
Title: The rights of ownership recognized and protected
by law. It is a combination of all elements that constitute
the highest legal right to own, possess, use, control, enjoy,
transfer and dispose of real estate.
Title Insurance Policy: This policy protects the
purchaser, mortgage or other party against defects and
losses associated with the title.
Townhouse: Architectural term describing a two or
more story unit with no units above or below, but with
one or more shared walls. Ownership may be in the
form of condominium, planned unit development or
VA Loan: A loan made by a private lender that is
partially guaranteed by the Veterans Administration.
Wood Destroying Pest and Organisms
Inspection: An inspection identifying existing or
potential pest, dry rot, fungus and other structurethreatening
infestation or conditions. Sometimes referred
to as “termite inspection.”
Zoning: Laws passed by local governments regulating
the size, type, structure, nature and use of land or