Reverse Mortgage Glossary
adjustable-rate mortgage (ARM): A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes.
amortization: Your loan payment consists of a monthly interest on your loan, any impounds such as property taxes or insurance, and principal reduction. The interest portion decreases as the loan balance decreases, and the remainder of the payment for principal, which remains constant, increases. This is called amortization, and the monthly details can be seen in advance on an amortization schedule.
annual percentage rate (APR): APR is a value created according to a government formula giving the true annual cost of borrowing. This will be slightly different and higher than the quoted note rate.
appraisal: Your mortgage lender will require an appraisal of the property, which is a third-party evaluation of the value of the property you are planning to purchase, based in large part on similar recent sales. The lender will only lend based on the appraisal. Thus, if the appraisal is less than your contracted price, you may choose to renegotiate the price with the seller. The appraisal is also subject to appeal and negotiation with the appraiser, but only to the extent that you can show factual data that might affect the price.
appreciation: To the extent that your property increases in value over time, it is said to appreciate. This may help you to refinance the property or to sell at a profit.
assessed value: Your property taxes are determined by an assessment of the value of your property. The assessor who determines this value may or may not agree with the appraised value.
asset: Those things that you own that have value are assets. Assets are divided into liquid assets that can be easily and quickly converted to cash including: bank accounts, stocks, bonds, mutual funds, gold, etc. Other assets (which are illiquid) include: real estate, personal property such as art, collectibles, and debts owed to you by others.
broker: In the real estate business, you are likely to encounter real estate brokers and mortgage brokers. Most real estate and mortgage professionals are agents who must work under a broker. Some agents are brokers as well. Brokers generally require a different license and the license requires greater levels of education and accountability.
cap: ARMs (Adjustable Rate Mortgages) have fluctuating interest rates. Generally, there is a period of 5-7 years where the rate is fixed, after which there is an adjustment based on an index. The fluctuations are limited to a certain amount. The maximum interest rate that can be paid on an ARM is the cap.
clear title: A title which has no liens or legal questions as to ownership of the property.
closing: When a real estate transaction has finished escrow, the next step is for the transaction to close. Closing can mean different things in different states such as being recorded at the local recorder’s office. In other states it means a signing off al ofl the documents and money deposited into the buyer’s accounts.
closing costs: The mortgage lender will generally collect certain costs at closing. These cost will include certain transactional costs having to do with the loan and prepaid items such as property taxes and homeowners insurance. Your lender estimates the amount of non-recurring transactional costs and prepaid items and sends you a good faith estimate of these costs within three days of receiving your application.
cloud on title: The purpose of a title search is to help the buyer and the mortgage bank determine if there are any legal issues with regard to ownership by the current owner. These defects or clouds might include such things as liens, unresolved legal disputes, or other questions. These clouds on title commonly can only be resolved by deed, releases, or court action.
co-borrower: An additional individual such as a spouse, other relative(s), or partner(s) who are obligated on the loan and may also be on title to the property.
collateral: Collateral refers generally to any item of value that can serve as a guarantee for repayment of the loan. Your property is the collateral for the purposes of a mortgage. You, as the borrower, risk losing the property (collateral) if you fail to repay the borrowed funds according to the terms of the mortgage or deed of trust.
common area assessments: If you live in a community where there is shared property or facilities, such as common walls, roofs, parking, parks, easements, swimming pools, club houses, etc., there will be an entity commonly known as a home owners’ association, which will oversee these assets. The board (usually consisting of member/owners of the community, determine an annual budget to pay for upkeep and costs for these assets. The board then charges the owners a monthly fee that covers these costs.
common areas: If you live in a community where there is shared property or facilities, such as common walls, roofs, parking parks, easements, swimming pools, club houses, etc. Those portions of any building, land, and amenities owned (or managed) by the association are called common areas.
community property: In some states, any assets acquired by a married couple during their marriage is considered to be owned jointly for the purposes of any legal claims. This generally has the greatest application in the case of divorce, when such assets are being divided. California is a community property state.
comparable sales: After you enter into escrow, your bank will require that an appraiser determine the current “market” price of your home. To do this, the appraiser will look at the number of rooms, square feet of the home and the land, age and condition of the home, and other factors. The appraiser will then compare these elements to other homes in the area that have recently sold to determine the value of the home you are buying. The recent home sales are called comparable or comp sales
condominium: A type of home or business facility where the individual owners of their units have title to the interior of their unit only. They then share in the ownership of the common areas, including exterior building walls, roofs, etc.
conforming loan: A type of loan that meets the guidelines set up by government agencies Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). For the buyer, this means they must meet critical financial rations such as the debt to income ratio. The loan maximum for conforming loans is currently $453,000 in most parts of the US, but $679.650 in high cost areas.
construction loan: When purchasing a property, you may wish to make substantial improvements immediately, from adding space to rebuilding from the ground up. Many lenders offer short term financing for the cost of construction. The lender pays the contractor or suppliers as the work progresses. When the construction is completed, the construction loan and purchase loan are rolled into a new mortgage.
contingency: When purchasing a new property, you may need to sell your home to generate the necessary down payment for the new home. Or you might not want to be fully committed to the purchase until the mortgage has been 100% signed off by the lender. These and other requirements that must be met before the contract can be finished are called contingencies. In a sellers’ market it is better to keep contingencies to a minimum or the seller is likely to accept a competing offer from someone who has fewer contingencies.
contract: A contract is a legal term that for the purposes of real estate would be a written agreement to move forward on the sale of a property. The contract happens after the offer has been made by the buyer and accepted by the seller. In real estate transactions, the contract then enters escrow, and it is not unusual for that contract to require renegotiation during escrow. The contract is finally closed at the end of escrow when the final transfer of money and property takes place.
conventional mortgage: Refers to home loans that are not insured or guaranteed by government agencies such as the FHA or VA. As such it must meet the requirements of that agency in order for the agency to guarantee the loan to the lender. The primary requirement is the size of the loan which varies by location. In most of the country, conventional mortgages are those above $453,000, but above $679.650 in high cost areas.
convertible ARM: An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.
credit report: Lenders and credit card companies, and others who have an interest in your credit worthiness will look at your credit report to determine some aspects of your credit history. These reports are prepared primarily by TransUnion, Experian, and Equifax. Most mortgage lenders rely on your FICO score which is derived from a combination of all three credit reporting agencies. Your interest rate will be determined in large measure by your FICO score.
deed: The legal document conveying title to real property.
deed of trust: California records a deed of trust rather than a deed as the document conveying title. Some other states have this difference, as well.
deposit: When you enter into a contract on a property, you will have negotiated the amount of the deposit, also known as a earnest money deposit. This amount is commonly subject to forfeit if you break the contract without a legal reason.
depreciation: An accounting term showing a reduction in value of an asset (home, building) over time. This information is important for tax considerations when the property is being purchased for rent or lease. The amount of depreciation per year is determined by law.
down payment: When you buy property, the lender will commonly only loan a certain percentage of the value, commonly 80% - 97%. The balance, 3% - 20% must be paid by the purchaser/borrower, and is called the down payment. The more you pay for the down payment, the lower your monthly payments will be, because the principal will be less, the interest rate will be less, and for loans with less than 20% down, you may be required to purchase mortgage insurance (MI) from a private insurer (PMI) or from the FHA.
earnest money deposit: See deposit
equity: The amount in dollars of value in a property that you own. To find your equity subtract the loan payoff amount from the market value.
escrow: When you sign a purchase contract for real property, an escrow account is opened. All documents and funds are deposited with the escrow company until they and all parties are satisfied that the terms of the contract are all fulfilled. Then the escrow company sends the funds to the seller, less any disbursements (, files the deed or deed of trust with the appropriate government entity, and provides copies of all relevant documents to all parties.
exclusive listing: A common practice in residential real estate is a contractual agreement between the owner (seller) and the real estate agent and/or broker to pay commissions to that agent/broker if the sale takes place during the contractual period.
fair market value: The legal term for the fair market value of any item would be the highest price that a willing buyer would pay, and the lowest a seller would accept. In real estate, the fair market value is generally the contract amount. However, estimates of fair market value are available online, and from real estate agents. The final decision about value, however, is set by the appraiser, who determines that value based on recent sales of similar properties in the area.
Fannie Mae (FNMA): The Federal National Mortgage Association is the nation's largest supplier of home mortgage funds. Fannie Mae buys mortgages from loan originators (banks and other lenders) freeing up the lenders funds for new loans.
Federal Housing Administration (FHA): The FHA insures residential mortgage loans made by private lenders against default. In order for a buyer to acquire FHA insurance, the buyers credit and various terms of the loan must conform to FHA standards.
fixed-rate mortgage: A mortgage in which the interest rate does not change during the entire term of the loan. Most fixed rate mortgages are 10, 15, or 30 years, though other terms may be available. Generally, a borrower who plans to stay in the home for 7 years or more is better off with a fixed-rate mortgage.
government loan (mortgage): A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages that are not government loans are classified as conventional loans.
Government National Mortgage Association (Ginnie Mae): Performs the same role as Fannie Mae and Freddie but provides funds for government loans (FHA and VA)
hazard insurance: Insurance coverage that covers damages to property that occurs as the result of physical damage such as fire, wind, vandalism, or other hazards.
Home Equity Conversion Mortgage (HECM): Also known as a reverse mortgage. In a HECM, the lender makes payments to you in monthly payments, lump sums, lines of credit, or by merely eliminating any payments for a time or for the life of the owner(s).
home equity line of credit (HELOC): HELOCs are mortgage loan that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount with payments determined by the amount outstanding in any given period.
home inspection: An inspection by a professional that includes a written report about the structural and mechanical condition of the property. The inspection helps to protect the interest of the buyer, seller, and lender.
homeowners' association (HOA): A nonprofit association that manages and maintains the common areas of a condominium or a planned unit development (PUD).
homeowner's insurance: An insurance policy that covers potential losses due to fire, theft, wind, certain water damages, and personal liability exposure for a dwelling, the property, and its contents.
homeowner's warranty: Insurance purchased by homebuyers that covers repairs or replacement of heating or air conditioning, some included appliances, in case they break down within the coverage period.
jumbo loan: A loan that exceeds Fannie Mae's and Freddie Mac's loan limits, currently at $453,000 in most parts of the US, but $679.650 in high cost areas.
lender: The institution making the loan, such as an individual, bank or mortgage lender.
liabilities: An accounting term that refers to financial obligations or amounts you owe to others. This generally includes auto loans, credit card balances, taxes, liens, etc.,
lien: A legal claim against a property. Liens must be paid or set aside (an agreement where the holder of the lien agrees to allow the new lien to be the first lien) when a property is sold. A mortgage or first trust deed, and HELOCs are among the types of liens.
liquid asset: Cash or same-as-cash assets or an asset that is easily converted into cash.
loan servicing: After you obtain a loan, the actual mortgage holder may turn to another company to service the loan. They receive and process your payments, manage the escrow/impound account, collect delinquent loans, ensure that insurance and property taxes are made on the property, and provide various methods of reporting all critical data to you, the mortgage holder, and relevant government agencies.
lock-in: When you are in escrow, you may want to lock a favorable interest rate if you have reason to believe that interest rates might go up before closing. The lender will generally agree to lock the interest rate at a cost.
margin: When you use an ARM (adjustable rate mortgage, the difference between the interest rate and the agreed upon index is called the margin. The margin stays the same, but if the index moves up or down, the ARM interest rate will change.
mortgage: A legal financial document that provides the details of the property being used as collateral on the loan, the amounts borrowed, and the terms of repayment. Some states use First Trust Deeds.
mortgage banker: A mortgage banker commonly both originates and fund their own loans. This might then be sold to other private or government entities, usually to Fannie Mae, Freddie Mac, or Ginnie Mae.
mortgage broker: A company that helps buyers find a mortgage. The broker will have relationships with various banks and other lending companies, and provides the buyer with a match between his needs, credit record, and other factors and the best loan for the buyer.
mortgage insurance (MI): When you borrow more than 80% of the appraised value of a home, you will generally be required by the lender to have some type of mortgage insurance. This can be supplied by private insurers or the FHA or VA programs.
PITI: Principal, interest, taxes and insurance. If you have mortgage with an impound account, your monthly payment will include all of these, and possibly mortgage insurance, too. The lender also calculates this amount and uses it as part of figuring your debt-to-income ratio.
point: One percent of the amount of the mortgage.
power of attorney: A legal document that authorizes a person to act on another’s behalf.
pre-approval: When making an offer on a property, having a pre-approval of your ability to borrow can help to make your offer stand out. In tight markets where there are several offers on the property, not having a pre-approval may disqualify your offer from even being considered. The pre-approval is different than a pre-qualification letter, in that the pre-approval letter indicates that the lender has carefully looked at the buyer’s qualifications and will grant the loan in almost all circumstances.
prepayment: Amounts, up to including the full remaining principal, paid to reduce or pay off the principal balance of a loan before the due date.
prepayment penalty: Fees charged when a loan is paid before it is due.
pre-qualification: A pre-qualification letter is sometimes used by a loan officer to provide the buyer with a good estimate of their ability to borrow, thus helping them determine what they can afford. This letter can be used as part of an offer to give the seller confidence in the ability of the buyer to get a mortgage. In tight markets, a pre-approval letter is what you will want to provide.
principal: The amount borrowed or remaining unpaid. Each month that you pay your mortgage, the principal will
quitclaim deed: A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
rate lock: When you are in escrow, you may want to lock a favorable interest rate if you have reason to believe that interest rates might go up before closing. The lender will generally agree to lock the interest rate at a cost.
real estate agent: A person licensed to work with buyers and sellers of real estate to market for sellers, locate for buyers, negotiate, and transact the sale of real estate.
real property: Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.
Realtor: A tightly guarded registered trademark of an association that holds member real estate agents, brokers. and associates who hold active memberships in a local real estate board that is affiliated with the National Association of Realtors to higher levels of service and accountability.
second mortgage: A mortgage that has a lien position subordinate to the first mortgage. If there is a foreclosure sale, the first mortgage is fully paid prior to any money being paid to the second mortgage.
title: A legal document evidencing a person's ownership of a property.
title company: A company that specializes in examining and insuring titles to real estate.
title insurance: Insurance that protects the lender or the buyer against losses that might occur arising from disputes over ownership of a property, unpaid liens, etc, that were not uncovered by the title company.
title search: A careful check of all pertaining government records to determine if the seller is the legal owner of the property, and to determine if there are any liens or other claims outstanding.