Watch out for an acceleration clause in your mortgage contract. This provision gives the lender the right to demand payment of the entire outstanding balance if you miss a monthly payment, sell the property, or otherwise fail to perform as promised under the terms of your mortgage.
adjustable-rate mortgage (ARM)
An adjustable-rate mortgage is a mortgage whose interest rate and monthly payments vary throughout its life. ARMs typically start with an unusually low interest rate that gradually rises over time. If the overall level of interest rates drops, as measured by a variety of different indexes, the interest rate of your ARM generally follows suit. Similarly, if interest rates rise, so does your mortgage's interest rate and monthly payment. Caps limit the amount that the interest rate can fluctuate. Before you agree to an adjustable-rate mortgage, be sure that you can afford the highest payments that would result if the interest rate on your mortgage increased to the maximum allowed.
adjusted cost basis
For tax purposes, the adjusted cost basis is important when you sell your property, because it allows you to determine what your profit or loss is. You can arrive at the adjusted cost basis by adding the cost of the capital improvements that you've made to the home to the price that you paid for the home. Capital improvements increase your property's value and its life expectancy.
adjusted sale price
An adjusted sale price is the actual selling price of a house less the expenses of sale, such as real estate agent commissions, legal fees, and so on.
adjustment period or adjustment frequency
This term refers to how often the interest rate for an adjustable-rate mortgage changes. Some adjustable-rate mortgages change every month, but it is more typical to have one or two adjustments per year. The less frequently your loan rate shifts, the less financial uncertainty you may have. But less frequent adjustments in your mortgage rate mean that you will probably have a higher teaser, or initial interest, rate. (The initial interest rate is also called the "start rate.")
annual percentage rate (APR)
This figure states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points, and any other add-on loan fees and costs. The APR is thus invariably higher than the rate of interest that the lender quotes for the mortgage.
Mortgage lenders require an appraiser to give an opinion of the market value of a house a homeowner wants to sell or refinance. This professional opinion helps to protect the lender from lending money on a house that is worth less than the amount the buyers have agreed to pay for it or that the seller wishes to obtain when refinancing the existing loan. For typical houses, the appraisal fee is in the $200 to $300 range and is usually paid for by the borrower.
Appreciation refers to the increase of a property's value. Depreciation (the reverse of appreciation) is when a property's value decreases.
arbitration of disputes
A method of solving contract disputes that is generally less costly and faster than going to a court of law. In arbitration, buyers and sellers present their differences to a neutral arbitrator who, after hearing the evidence, makes a decision that resolves the disagreement. The arbitrator's decision is final and may be enforced as if it were a court judgment. Consult a real estate lawyer if you are ever a party in an arbitration.
The assessed value is the value of a property for the purpose of determining property taxes. This figure depends on the methodology used by the local tax assessor and, thus, may differ from the appraised or market value of the property.
Some mortgages allow future buyers of your home to take over the remaining loan balance of your mortgage. If you need to sell your house but interest rates are high, having an assumable mortgage may be handy. You may be able to offer the buyer your assumable loan at a lower interest rate than the current going interest rate. Most assumables are adjustable-rate mortgages -- fixed-rate, assumable mortgages are nearly extinct these days because lenders realize that they lose a great deal of money on these types of mortgages when interest rates skyrocket.
This kind of loan requires level payments just as a 15- or 30-year fixed-rate mortgage does. However, well before the loan's maturity date (the date when it would normally be paid off if the borrower kept making those fixed, monthly payments) -- typically three to ten years after its start date -- the full remaining balance of a balloon loan becomes due and payable. Although balloon loans can save you money because they charge a lower rate of interest relative to fixed-rate loans, balloon loans are dangerous. If you don't have a big chunk of cash sitting around somewhere to pay off the outstanding balance, you'll be forced to refinance the loan. Refinancing a loan is never a sure thing because your employment and financial situation may change, and interest rates may fluctuate.
If you find yourself in the inadvisable situation where you have closed on a new home before you have sold your old one, you may need a short-term bridge loan. Such loans enable you to borrow against the equity that is tied up in your old house until it sells. We say "bridge" because such a loan is the only thing keeping you above water financially during this period when you own two houses. Bridge loans are expensive compared to other alternatives, such as using a cash reserve, borrowing from family or friends, or using the proceeds from the sale of your current home. In most cases, you need the bridge loan for only a few months in order to tide you over until you sell your house. Thus, the loan fees can represent a high cost (about 10 percent of the loan amount) for such a short-term loan.
Real estate brokers are one level higher on the real estate professional totem pole than real estate agents (or salespeople). Real estate agents cannot legally work on their own -- they must be supervised by a broker. To become a broker in most states, a real estate salesperson must have a number of years of full-time real estate experience, meet special educational requirements, and pass a state licensing exam.
In a buydown, the builder or house seller agrees to pay part of the home buyer's mortgage for the first few years. The term also refers to the practice of a seller paying a mortgage lender a predetermined amount of money to reduce his or her mortgage interest rate, thereby creating more attractive financing for a potential buyer. Veterans with low or modest incomes may be able to get buydowns through a Veterans Administration loan plan that is available in some new housing developments.
Historically, real estate brokers and agents worked only for sellers. A buyer's broker, on the other hand, only owes allegiance to the buyer and does not have an agent relationship with the seller. Buyer's brokers are generally paid on a commission basis, a percentage of the purchase price of the home you buy.
For tax purposes, a capital gain is the profit that you make when you sell a home. For example, if you buy a home for $125,000 and then (a number of years later) you sell the house for $175,000, your capital gain is $50,000. A sizable amount of capital gains on a house sale is excluded from federal tax: up to $250,000 for qualifying single taxpayers and $500,000 for married couples filing jointly.
There are two different types of caps for adjustable-rate mortgages. The life cap limits the highest or lowest interest rate that is allowed over the entire life of your mortgage. The periodic cap limits the amount that your interest rate can change in one adjustment period. A one-year ARM, for example, may have a start rate of 7.5 percent with a + or - 2 percent periodic adjustment cap and a 6 percent life cap. On a worst-case basis, the loan's interest rate would be 9.5 percent in the second year, 11.5 percent in the third year, and 13.5 percent (7.5 percent start rate plus the 6 percent life cap) forevermore, starting with the fourth year.
Most mortgage lenders require that homebuyers have sufficient cash left over after closing on their home purchase in order to make the first two mortgage payments or to cover a financial emergency.
These costs generally total from 2 percent to 5 percent of the home's purchase price and are completely independent of (and in addition to) the down payment. Closing costs include such things as points (that is, loan origination fee to cover lender's administrative costs), an appraisal fee, a credit report fee, mortgage interest for the period between the closing date and the first mortgage payment, homeowners insurance premium, title insurance, prorated property taxes, and recording and transferring charges. So when you are finally ready to buy, you need to have enough cash to pay all these costs in order to buy your dream home.
The commission is the percentage of the selling price of a house that is paid to the real estate agents and brokers. The price and type of property being sold also affect the commission percentage. If there is both an agent representing the seller and an agent representing they buyer, they divide the commission.
Common areas are the shared ownership portions of a condominium complex (such as the lobby, recreational areas, parking lot, underlying land on which buildings are located, and so on).
Along with joint tenancy and tenancy-in-common, community property is a way that married couples may take title to real property. Community property offers two major advantages over joint tenancy and tenancy-in-common. First, community property ownership allows spouses to transfer interests, by a will or otherwise, to whomever they wish. The second advantage of holding title to a home in community property is that the surviving spouse gets favorable tax treatment. The market value of the entire house as of the spouse's date of death (such market value is also called the house's "stepped-up basis") is used rather than the house's original cost, which reduces the taxable profit (assuming that the home has appreciated in value) when the house is sold.
comparable market analysis (CMA)
In order to price your house appropriately, you need to know how much houses like yours are selling for. Identify houses "comparable" to yours that sold within the last six months, are in the immediate vicinity of your house, and are as similar as possible to your house in terms of size, age, and condition. By analyzing the asking prices of houses comparable to yours that are currently on the market, you can see whether prices are rising, flat, or declining. A written analysis of comparable houses currently being offered for sale and comparable houses that sold in the past six months is called a comparable market analysis (CMA).
Condominiums are housing units that are contained within a development area in which you own your actual unit and a share of everything else in the development (lobby, parking areas, land, and the like, which are known as common areas). Condominiums are a less-expensive form of housing than single-family homes are. For this reason, condominiums are mistakenly seen as good starter houses. Unfortunately, condominiums generally don't increase in value as rapidly as single-family houses do because the demand for condos is lower than the demand for houses. And, because condominiums are far easier for builders to develop than single-family homes are, the supply of condominiums often exceeds the demand for them.
Contingencies are conditions contained in almost all home purchase offers. The seller or buyer must meet or waive all contingencies before the deal can be closed. These conditions relate to such factors as the buyer's review and approval of property inspections or the buyer's ability to get the mortgage financing that is specified in the contract. Sellers may include contingencies as well, such as making the sale of their house contingent upon their successful purchase of another home. If a contingency cannot be met, the party for whom it was established may legitimately withdraw from a contract.
convertible adjustable-rate mortgages
Unlike conventional adjustable-rate mortgages, convertible adjustable-rate mortgages give you the opportunity to convert to a fixed-rate mortgage, usually between the 13th to 60th month of the loan. For this privilege, convertible adjustable-rate mortgage loans have a higher rate of interest than conventional adjustable-rate mortgages, and a conversion fee (which can range from a few hundred dollars to 1 percent or so of the remaining balance) is charged. Additionally, if you choose to convert to a fixed-rate mortgage, you will pay a slightly higher rate than what you can get by shopping around for the best rates available at the time you convert.
Cooperatives are apartment buildings where you own a share of a corporation whose main asset is the building that you live in. In high-cost areas, cooperatives (like their cousins, condominiums and townhouses) are cheaper alternatives to buying single-family houses. Unfortunately, cooperatives also resemble their cousins in that they generally lag behind single-family homes in terms of appreciation. Co-ops are also, as a rule, harder to sell and obtain loans for than condominiums.
If you have a checkered past in the credit world, you may need help securing a mortgage, even though you are financially stable. A friend or relative can come to your rescue by cosigning (which literally means being indebted for) a mortgage. A cosigner cannot improve your credit report but can improve your chances of getting a mortgage. Cosigners should be aware, however, that cosigning for your loan will adversely affect their future creditworthiness since your loan becomes what is known as a contingent liability against their borrowing power.
See adjusted cost basis.
covenants, conditions, and restrictions (CC&Rs)
CC&Rs establish a condominium by creating a homeowners association, by stipulating how the condominium's maintenance and repairs will be handled, and by regulating what can and can't be done to individual units and the condominium's common areas. These restrictions may apply to lawn maintenance, window curtain colors, and the like. Some CC&Rs put community decision-making rights into the hands of a homeowners association.
A credit report is the main report that a lender uses to determine an applicant's creditworthiness. Applicants must pay for a lender to obtain this report, which the lender uses to determine the applicant's ability to handle all forms of credit and to pay off loans in a timely fashion. If you are providing financing to the buyer of your property, be sure to run a credit report on the buyer/borrower.
Before you go out home buying, you should determine what your price range is. Lenders generally figure that you shouldn't spend more than about 33 to 40 percent of your monthly income for your housing costs. The debt-to-income ratio measures your future monthly housing expenses, which include your proposed mortgage payment (debt), property tax, and insurance, in relation to your monthly income.
A deed is the document that conveys title to real property. Before you receive the deed, the title insurance company must receive the mortgage company's payment and your payments for the down payment and closing costs. The title insurance company must also show that the seller holds clear and legal title to the property for which title is being conveyed.
Default is the failure to make your monthly mortgage payments on time. You are officially in default when you have missed two or more monthly payments. Default also refers to other violations of the mortgage terms. Default can lead to foreclosure on your house.
At first you are delinquent; then you are in default. Delinquency occurs when a monthly mortgage payment is not received by the due date.
See transfer disclosure statement.
The down payment is the part of the purchase price that the buyer pays in cash, up front, and does not finance with a mortgage. Generally, the larger the down payment, the better the deal that you can get on a mortgage. You can usually get access to the best mortgage programs with a down payment of 20 percent of the home's purchase price.
A due-on-sale clause contained in the mortgage entitles the lender to demand full payment of all money due on your loan when you sell or transfer title to the property.
A home buyer's "good faith" deposit that accompanies a written purchase offer.
Although the West Coast is often associated with earthquakes, other areas are also prone to earthquakes. An earthquake insurance rider on a homeowners policy pays to repair or rebuild your home if it is damaged in an earthquake. If you live in an area with earthquake risk, get earthquake insurance coverage!
An encumbrance is a right or interest someone else holds in a homeowner's property that affects its title or limits its use. A mortgage, for example, is a money encumbrance that affects a property's title by making it security for repayment of the loan. A right-of-way for someone to pass over land or an easement granted to the local utility company to run sewer lines under a property are examples of non-money encumbrances.
The difference between the market value of a house and the amount the homeowner owes on it. For example, if your house is worth $180,000 and you have an outstanding mortgage of $110,000, your equity is $70,000.
Escrow is the holding -- by a neutral third party called, naturally, a closing officer -- of important documents and money related to the sale of a house. After a seller accepts a buyer's offer to purchase property, the buyer does not immediately move in. A period follows when contingencies have to be met or waived. During this period, the escrow service holds the buyer's down payment and documents pertaining to the sale. "Closing escrow" means that the deal is completed. Among other duties, the closing officer makes sure that all the players in the transaction -- mortgage companies, real estate agents, and, of course, the seller -- are paid the amount that is due them.
exclusive agency listing
An exclusive agency listing is a listing contract between property owners and a real estate broker that is very similar to an exclusive right to sell listing except that the property owners specifically reserve the right to sell the house themselves without compensating the listing broker if they find the buyer.
An exclusive right-to-sell listing is a listing contract between a property owner and a real estate broker in which the property owner agrees to compensate the listing broker if anyone, including the property owner, sells the house during the listing period.
fair market value
The price a market-educated buyer will pay and a market-savvy seller will accept for property given that neither the seller nor the buyer is under duress caused by a divorce, an unanticipated job transfer, or some other circumstance that puts either party under pressure to perform quickly.
See Federal National Mortgage Association.
Federal Home Loan Mortgage Corporation (FHLMC)
The FHLMC (or Freddie Mac) is one of the best-known institutions in the secondary mortgage market. Freddie Mac buys mortgages from banks and other mortgage-lending institutions and, in turn, sells these mortgages to investors. These loan investments are considered safe because Freddie Mac buys mortgages only from companies that conform to its stringent mortgage regulations, and Freddie Mac guarantees the repayment of principal and interest on the mortgages that it sells.
Federal Housing Administration mortgage (FHA)
Federal Housing Administration mortgages are marketed to people with modest means. The main advantage of these mortgages is that they require a small down payment (usually between 3 percent and 5 percent). FHA mortgages also offer competitive interest rates -- typically 1/2 to 1 percent below the interest rates on other mortgages. The downside is that, with an FHA mortgage, the buyer must purchase mortgage default insurance.
Federal National Mortgage Association (FNMA)
The FNMA (or Fannie Mae) is one of the best-known institutions in the secondary mortgage market. Fannie Mae buys mortgages from banks and other mortgage-lending institutions and, in turn, sells them to investors. These loan investments are considered safe because Fannie Mae buys mortgages only from companies that conform to its stringent mortgage regulations, and Fannie Mae guarantees the repayment of principal and interest on the loans that it sells.
The fixed-rate mortgage is the granddaddy of all mortgages. You lock into an interest rate (for example, 8.5 percent), and it never changes during the life (term) of your 15- or 30-year mortgage. Your mortgage payment will be the same amount each and every month. Compare fixed-rate mortgages with adjustable-rate mortgages.
In federally designated flood areas, flood insurance is required. If there's even a remote chance that your area may flood, having flood insurance is prudent.
Foreclosure is the legal process of the mortgage lender taking possession of and selling the property to attempt to satisfy indebtedness. When you default on a mortgage and the lender deems that you're incapable of making payments, you may lose your house to foreclosure. Being in default, however, does not necessarily lead to foreclosure. Some lenders are lenient and help you work out a solution if they see that your problems are temporary. Foreclosure is traumatic for the homeowner and expensive for the lender.
In real estate lingo, the formula is how you calculate interest rates for adjustable-rate mortgages. Add the margin to the index to get the interest rate (margin + index = interest rate).
See Federal Home Loan Mortgage Corporation.
A FSBO is a property that is For Sale By Owner. In other words, the property is not listed for sale through a real estate broker.
A rare bird these days, the graduated-payment mortgage gives you the opportunity to cut your total interest costs. With a graduated-payment mortgage, your monthly payments are increased by a predetermined formula (for example, a 3 percent increase each year for seven years, after which time payments no longer fluctuate). If you expect to land a job that may allow you to make these higher payments, you may want to consider this option.
home warranty plan
A home warranty plan is a type of insurance that covers repairs to specific parts of the home for a predetermined time period.
A home-equity loan is technical jargon for what used to be called a second mortgage. With this type of loan, you borrow against the equity in your house. If used wisely, a home-equity loan can help people pay off high-interest consumer debt, which is usually at a higher interest rate than a home-equity loan and is not tax-deductible; or a home-equity loan can be used for other short-term needs, such as for payments on a remodeling project.
Required and necessary. No ifs, ands, or buts about it; you need "dwelling coverage" that can cover the cost to rebuild your house. The liability insurance portion of this policy protects you against accidents that occur on your property. Another essential piece is the personal property coverage that pays to replace your lost worldly possessions and usually totals 50 to 75 percent of the dwelling coverage. Finally, get flood or earthquake insurance if you're in an area susceptible to these natural disasters. As with other types of insurance, get the highest deductibles with which you are comfortable.
Like homeowners insurance, we think that a house inspection is a necessity. The following should be inspected: overall condition of the property, inside and out; electrical, heating, and plumbing systems; foundation; roof; pest control and dry rot; and seismic/slide risk. A good house inspection can save you money by locating problems. With the inspection report in hand, you can ask the seller to either do repairs or reduce the purchase price. Hire your own inspectors. Never be satisfied with a seller's inspection reports.
A hybrid loan combines the features of fixed-rate and adjustable-rate mortgages. The initial interest rate for a hybrid loan may be fixed for the first three to ten years of the loan (as opposed to only six to twelve months for a standard adjustable-rate mortgage), and then adjusted biannually or annually. The longer the initial interest rate remains the same, the higher the interest rate is. These hybrid loans are best for people who plan to own their house for a short time (less than ten years) and who do not like the volatility of a typical adjustable-rate mortgage.
The index is the measure of the overall level of interest rates that the lender uses as a reference to calculate the specific interest rate on an adjustable-rate loan. The index plus the margin is the formula for determining the interest rate on an adjustable-rate mortgage. One index used on some mortgages is the six-month Treasury bill. If the going rate for these treasury bills is 5.5 percent and the margin is 2.5 percent, your interest rate would be 8 percent. Other common indexes used are certificates of deposit index, 11th District Cost of Funds index, and LIBOR index.
Interest is what lenders charge you to use their money. Lenders generally charge higher rates of interest on higher-risk loans. For fixed-rate mortgages, remember that the interest rate has a seesaw relationship with the points. A high number of points is usually associated with a lower interest rate, and vice versa. For an adjustable-rate mortgage, make sure that you understand the formula (the index plus the margin) that determines how the interest rate is calculated after the teaser rate expires.
Real estate is a good long-term investment -- it has produced returns similar to those from diversified stock portfolios over the years. In practice, investment in real estate is different from investment in stocks. You can also leverage your real estate investment -- that is, you can make a profit on your investment as well as on borrowed money. Investing in real estate is time intensive (although investing in stocks can be, too, if you don't use a professional money manager). You also need to be adept at managing people and money if you are to bear fruit with real estate investments. One drawback of investment property is that you cannot shelter your investment-property profits in a retirement account the way you can shelter profits earned through stock investments.
Joint tenancy is a form of co-ownership that gives each tenant equal interest and rights in the property, including the right of survivorship. At the death of one joint tenant, ownership automatically transfers to the surviving joint tenant. This form of ownership is most appropriate for unmarried people in a long-term relationship. Some of the limitations of joint tenancy are (first) that each person must own an equal share of the house and (second) the right of survivorship is terminated if one person transfers his deed from joint tenancy to tenancy-in-common.
A late charge is a fee that is charged if a mortgage payment is received late. A late charge can be steep -- as much as 5 percent of the amount of your mortgage payment.
A property that you can lease with an option to purchase at a later date has a lease-option contract. These contracts usually require an up-front payment (called "option consideration") to secure the purchase option. The consideration is usually credited toward your down payment when you exercise your option to buy the home. An important factor in a lease-option agreement is what portion of the monthly rent payments (typically one-third) is applied toward the purchase price if you buy. You'll usually pay a slightly higher rent because of the lease-option privilege.
Leverage refers to exerting great influence with little effort. Buying a house allows you to leverage your cash in two ways. Suppose, for example, that you make a 20 percent down payment on a $100,000 house - thus investing $20,000. The first leverage is that you control a $100,000 property with $20,000. If your house appreciates to a value of $120,000, you've made a $20,000 profit on a $20,000 investment -- a 100 percent return thanks to leveraging.
A lien is a legal claim against a property for the purpose of securing payment for work performed and money owed on account of loans, judgments, or claims. Liens are encumbrances, and they need to be paid off before a property can be sold or title can be transferred to a subsequent buyer. The liens that exist on a property for sale appear in a property's preliminary title report.
The total amount that your adjustable-rate mortgage interest rate and monthly payment can fluctuate up or down during the duration of the loan is determined by the life cap. The life cap is different from the periodic cap that limits the extent to which your interest rate can change up or down in any one adjustment period.
In most real estate contracts, buyers and sellers may agree at the beginning of the transaction regarding how much money would be awarded to one party if the other party violates the terms of the contract without good cause. Liquidated damages confine and define how much money the injured party may recover. Buyers, for example, generally limit their losses to the amount of their deposit. Discuss the advisability of using the liquidated damages provision with a lawyer or real estate agent.
The real estate broker who lists a property for sale and who, if the terms of the listing contract are satisfied, will be compensated, typically in the form of a commission on the selling price of the house, when the property sells.
An employment contract between a property seller and a real estate broker. Under the terms of a listing contract, the property seller agrees to compensate the broker for procuring a ready, willing, and able buyer for the property.
A lock-in is a mortgage lender's commitment and written agreement to guarantee a specified interest rate to the homebuyer, provided that the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing. Most lenders will not lock in your mortgage interest rate unless you have made an offer on the property and the property has been appraised. For the privilege of locking in the rate in advance of the closing of a loan, you may pay a slight interest rate premium.
The margin is the amount that is added to the index in order to calculate your interest rate for an adjustable-rate mortgage. Most loans have margins around 2.5 percent. Unlike the index (which constantly moves up and down), the margin never changes over the life of the loan.
See fair market value.
A title to property that is free and clear of objectionable liens and encumbrances and thus acceptable to buyers and mortgage lenders.
An encumbrance filed on title to a property by contractors or workmen who claim that the owner still owes them money for labor or materials expended to improve the property.
mediation of disputes
Mediation is a fast, inexpensive way to resolve simple contract disputes. In mediation, buyers and sellers present their differences to a neutral mediator who does not have the power to impose a settlement on either party. Instead, the mediator helps buyers and sellers work together to reach a mutually acceptable solution of their differences. It is probably in your best interests to mediate your problem before going to an arbitrator or suing in a court of law.
A mortgage broker is a person who can help you find a mortgage. Mortgage brokers buy mortgages wholesale from lenders and then mark the mortgages up (typically from 0.5 to 1 percent) and sell them to buyers. A good mortgage broker is most helpful for people who will not shop around on their own for a mortgage or for people who have blemishes on their credit reports.
mortgage life insurance
Mortgage life insurance guarantees that the lender will receive its money in the event that you meet an untimely demise. Many people may try to convince you that you need this insurance to protect your dependents and loved ones. We recommend that you do not waste your time or money with this insurance! Mortgage life insurance is expensive. If you need life insurance, buy low-cost, high-quality term life insurance rather than mortgage life insurance.
Multiple Listing Service
A Multiple Listing Service (or MLS) is a real estate agents' cooperative service that contains descriptions of most of the houses that are for sale. Real estate agents use this computer-based service to keep up with properties listed for sale by members of the Multiple Listing Service in their area.
Although it may sound like science fiction jargon, negative amortization occurs when your outstanding mortgage balance increases despite the fact that you're making the required monthly payments. Negative amortization occurs with adjustable-rate mortgages that cap the increase in your monthly payment but do not cap the interest rate. Therefore, your monthly payments do not cover all the interest that you actually owe. If you have ever watched your credit card balance snowball as you made only the minimum monthly payment, then you already have experience with this phenomenon. Avoid loans with this feature!
An open listing is a non-exclusive listing contract that may be given to any number of real estate brokers. A seller is obligated to compensate the first broker who either secures a buyer ready, willing, and able to meet the terms of the listing contract or procures an acceptable offer. If the seller finds the buyer, he or she doesn't have to pay any of the brokers a commission.
A partnership is a way for unmarried people to take title of a property. Partnerships most often occur among people who have a business relationship and who buy the property as either a business asset or for investment purposes. If you intend to buy property with partners, have a real estate lawyer prepare a written partnership agreement for all the partners to sign before making an offer to purchase.
This cap limits the amount that the interest rate of an adjustable-rate mortgage can change up or down in one adjustment period.
Also known as a loan's origination fee, points are interest charges paid up-front when you close on your loan. Points are actually a percentage of your total loan amount (one point is equal to 1 percent of the loan amount). For a $100,000 loan, one point costs you $1,000. Generally speaking, the more points that a loan has, the lower its interest rate should be. All the points that you pay on a purchase mortgage are deductible in the year that you pay them. If you refinance your mortgage, however, the points that you pay at the time that you refinance must be amortized over the life of the loan. If you get a 30-year mortgage when you refinance, for example, you can deduct only one-thirtieth of the points on your taxes each year.
One advantage of most mortgages is that you can make additional payments to pay the loan off faster if you have the inclination and the money to do so. A prepayment penalty discourages you from doing this by penalizing you for early payments. Some states prohibit lenders from penalizing people who prepay their loans. Avoid mortgages that penalize prepayment!
The principal is the amount that you borrow for a loan. If you borrow $100,000, your principal is $100,000. Each monthly mortgage payment consists of a portion of principal that must be repaid plus the interest that the lender is charging you for the use of the money. During the early years of your mortgage, your loan payment is primarily interest.
private mortgage insurance (PMI)
If the down payment is less than 20 percent of a home's purchase price, the borrower will probably need to purchase private mortgage insurance (also known as "mortgage default insurance"). Lenders feel that homeowners who can only come up with small down payments are more likely to default on their loans. Therefore, lenders make these homeowners buy PMI, which reimburses them the loan amount in case the borrower does default. Private mortgage insurance can add hundreds of dollars per year to loan costs. After the equity in the property increases to 20 percent, borrowers no longer need the insurance. Do not confuse this insurance with mortgage life insurance.
A probate sale is the sale of a home that occurs when a homeowner dies and the property is to be divided among inheritors or sold to pay debts. The executor of the estate organizes the probate sale, and a probate court judge oversees the process. The highest bidder receives the property.
You have to pay a property tax on the home you own. Annually, property tax averages 1 to 2 percent of a home's value, but property tax rates vary widely throughout this great land.
Certain items such as property taxes and homeowners association dues are continuing expenses that must be prorated (distributed) between the buyers and sellers at closing. If the buyers, for example, owe the sellers money for property taxes that the sellers paid in advance, the prorated amount of money due the sellers at closing is shown as a debit (charge) to the buyers and a credit to the sellers.
real estate agent
Real estate agents are the worker bees of real estate sales. Also called 'salespeople' or 'sales associates', agents are supervised by a real estate broker. Agents are licensed by the state; their pay is typically based totally on commissions generated by selling property.
real estate investment trust (REIT)
Real estate investment trusts are like a mutual fund of real estate investments. Such trusts invest in a collection of properties (from shopping centers to apartment buildings). REITs trade on the major stock exchanges. If you want to invest in real estate while avoiding the hassles inherent in owning property, real estate investment trusts may be the right choice for you.
A Realtor is a real estate agent or broker who belongs to the National Association of REALTORS(R) a trade association whose members agree to its ways of doing business and code of ethics. The National Association of REALTORS(R) offers its members seminars and courses that deal with real estate topics.
The discriminatory refusal to provide mortgage loans or homeowners insurance policies in certain neighborhoods due to a higher rate of problems with loans and insurance policies in such areas. Redlining is illegal!
Refinance, or "re-fi," is a fancy word for taking out a new mortgage loan (usually at a lower interest rate) to pay off an existing mortgage (generally at a higher interest rate). Refinancing is not automatic, nor is refinancing guaranteed. Refinancing can also be a hassle and expensive. Carefully weigh the costs and benefits of refinancing.
return on investment (ROI)
The return on investment is the percentage of profit that an investor makes on an investment. If, for example, you put $1,000 into an investment and a year later sell the investment for $1,100, you make $100. You calculate ROI by dividing the profit ($100) by your original investment ($1,000), which equals a 10 percent return
A reverse mortgage enables elderly homeowners, typically who are low on cash, to tap into their home's equity without selling their home or moving from it. Specifically, a lending institution makes a check out to you each month, and you can use the check as you want. This money is really a loan against the value of your home; because the money that you receive is a loan, the money is tax-free when you receive it. The downside of these loans is that they deplete your equity in your estate, the fees and interest rates tend to be on the high side, and some require repayment within a certain number of years.
A second mortgage is a mortgage that ranks after a first mortgage in priority of recording. In the event of a foreclosure, the proceeds from the sale of the home are used to pay off the loans in the order in which they were recorded. You can have a third (or even a fourth) mortgage, but the further down the line the mortgage is, the higher the risk of default on the mortgage -- hence, the higher interest rate that you'll pay on the mortgage.
In a shared-equity transaction, a private investor contributes money toward the purchase of a house and subsequently shares equity as a co-owner. When the house is sold, the investor takes a share of the profit or loss. These shared-equity transactions can become fairly complicated because the investor co-owner and the resident co-owner may have conflicts of interest. For example, the investor co-owner may want to sell the property to make a profit, but the resident co-owner may want to stay put. If you intend to participate in an equity-sharing transaction, have a lawyer who works with residential real estate partnerships prepare a written partnership agreement for all parties to sign prior to purchasing the property.
Many commonly used listing contracts permit the listing broker to delegate the work of procuring a buyer for the property to his or her salespeople as well as to cooperating brokers. All these people are classified as subagents. The listing broker is, however, liable for any work delegated to or performed by these subagents.
Tax deductible refers to payments that you may deduct against your federal and state taxable income. The interest portion of your mortgage payments, loan points, and property taxes are tax deductible.
Otherwise known as the initial interest rate, the teaser rate is the attractively low interest rate that most adjustable-rate mortgages start with. Don't be sucked into a mortgage because it has a low teaser rate. Look at the mortgage's formula (index + margin = interest rate) for a more reliable method of estimating the loan's future interest rate -- the interest rate that will apply after the loan is "fully indexed."
Tenancy-in-common is probably the best way for unmarried co-owners to take title to a home (except for those unmarried co-owners who are involved in close, long-term relationships -- see joint tenancy). Co-owners do not need to own equal shares of the property that is held as a tenancy-in-common. A tenancy-in-common also does not provide for the right of survivorship that automatically passes the deceased partner's ownership to the survivor without probate. The deceased's share of the property involved in a tenancy-in-common passes to the person named to receive that share of the property in the deceased's will or living trust.
The 72-hour clause
The 72-hour clause, also called a release clause, is commonly inserted into real estate purchase offers when the purchase of a home is contingent upon the sale of the buyer's current house. The seller accepts the buyer's offer, but reserves the right to accept a better offer if one should happen to come along. However, the seller cannot do this arbitrarily. If the seller receives an offer that he wants to accept, he must notify the buyer of that fact in writing. The buyer then usually has 72 hours (though the allotted amount of time can vary) from the seller's notification to remove the contingency-of-sale clause and move on with the purchase; otherwise, the buyer's offer is wiped out.
Title insurance covers the legal fees and expenses necessary to defend your title against claims that may be made against your ownership of the property. The extent of your coverage depends upon whether you have an owner's standard coverage or extended-coverage title insurance policy. To get a mortgage, you also have to buy a lender's title insurance policy to protect your lender against title risks.
Townhouse is the decorative name for a row (or attached) home. Townhouses are cheaper than single-family homes because they use common walls and roofs and save land. In terms of investment appreciation potential, townhouses lie somewhere between single-family homes and condominiums.
transfer disclosure statement (TDS)
Some states require that sellers give prospective buyers a written disclosure regarding all known property defects and all known material facts that may affect the property's value or desirability.
Veterans Administration loans
Backed by the Department of Veterans Affairs, Veterans Administration loans are fixed-rate mortgages for veterans of the American military services. The rules to obtain these mortgages are less stringent in certain respects than are the rules for conventional mortgages. Veterans Administration loans require no down payment as long as the appraised value of the house is below a certain threshold level, and the interest rate on Veterans Administration loans typically falls 0.5 to 1 percent below the rate that is currently being charged on conventional loans.
Certain city and county government bodies have the power to regulate the use of land and buildings. For example, the neighborhood where your house is located is probably zoned for residential use. It most likely also has zoning codes or ordinances to regulate building heights, yard sizes, and the percentage of lot coverage by buildings.