Buying/Selling Your Home and Other Real Estate

Glossary

Adjustable-rate mortgage (ARM): A loan in which the interest rate changes periodically. These changes, up or down, are linked to changes in a specified financial index, such as treasury bills. Most ARMs have a cap on interest rate increases.

Adjusted gross income (AGI): Generally, it is your total income, less net business losses, net allowable capital losses, IRA and KEOGH contributions, alimony, qualified student loan interest, and certain moving expenses. The AGI figure is used as a basis for computing certain deduction limitations.

After-tax: An amount of money after the tax is taken out. For example, you get paid $1,000. The tax taken out is $280. The after-tax amount is $720 ($1,000 minus $280).

After-tax rate of return: A measure of the performance of an investment expressed as a percentage of after-tax earnings to cash outlay.

Agent: The name for any licensed real estate professional (e.g., broker, realtor).

Amortization: The gradual repayment of a mortgage by periodic installments.

Annual percentage rate: The total finance charges paid (interest, loan fees, points) expressed as a percentage of the loan amount.

Applicable federal rate (AFR): Minimum interest rates that lenders must charge borrowers, which are set monthly by the IRS. If the AFR is above the interest rate charged at the time an installment agreement is signed, the seller may be required to add imputed interest to income.

Appraisal: The estimated market value of a property. It is usually conducted by a professional who is not an employee of the lender. Real estate, tax and insurance appraisals may differ widely and are used for different reasons.

Appreciation: An increase in the value of an asset.

Assessed value: The value a public tax assessor assigns to property as the basis of levying property taxes.

Balloon loan: A loan in which monthly payments are based on a fixed interest rate, usually for a short-term. Payments may cover interest only with principal due in full at the end of the term.

Basis: The amount you have invested in an asset, such as your home, against which you measure your gain or loss for tax purposes.

Before-tax rate of return: A measure of the performance of an investment expressed as a percentage of earnings before any deductions for income taxes to cash outlay.

Broker: An individual who is licensed to operate a real estate office.

Buyer's broker: A real estate professional who helps the buyer find the house, price, terms and conditions most favorable to the buyer as opposed to the seller.

Cap: The maximum amount an interest rate or monthly payment can change, either at established intervals or over the life of the mortgage.

Cash flow: Your income minus expenses.

Cash value: In a whole life policy, it is the amount of cash that is available to you.

Closing: The final step in transferring ownership of a property from the seller to the buyer. Frequently refers to the actual meeting where this occurs.

Closing costs: Fees and expenses, not including the price of the home, payable by the seller and the buyer at the closing. These usually include brokerage commissions, mortgage points, appraisal fee, title search and insurance, survey, inspections, attorney's fees, and recording fees.

Commission: Money paid to a real estate agent or broker by the seller as compensation for finding a buyer and completing the sale. Usually it is a percentage of the sale price that could be 6–7% on houses, 10% on land.

Conventional loan: A loan that is not backed by the federal government. Often these loans have fixed rates and terms.

Credit check: An investigation to determine creditworthiness based on credit history.

Deductible: In an insurance policy, a stated amount which the policyholder must pay for each claim or covered accident before receiving any reimbursement from the insurance company. Deductibles could range from $250 to $25,000. Generally, the higher the deductible, the lower the premium.

Deductions: Expenses which reduce your adjusted gross income for federal income tax purposes.

Deed: A legal document conveying title to property.

Depreciation: Deductions against income to write off the cost of an asset over its estimated useful life. It doesn't represent a cash outlay.

Dividends: Amounts paid by corporations periodically to their shareholders.

Down payment: Money paid to make up the difference between the purchase price of a property and the mortgage amount. Down payments are often 10% to 20% of the sales price on conventional loans; zero to 5% with FHA and VA loans.

Earnest Money Deposit: A part of the down payment, given to the seller by a buyer. Earnest money indicates the buyer's intent to complete the purchase of the property.

Emergency funds: The amount of money set aside for unexpected events.

Encumbrance: A legal right or interest in property that affects a good or clean title, and diminishes the property's value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, or unpaid taxes. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with encumbrance, or what can be done to remove it.

Equity: The value of an owner's interest in real estate. Equity is computed by subtracting from the property's fair market value the total of the unpaid mortgage balance and any outstanding debts against the property. A homeowner's equity increases as they pay off the mortgage or as the property appreciates in value. When the mortgage and all other debts against the property are paid in full, the homeowner has 100% equity in the property.

Escrow: The placement of money and documents with a third party for safekeeping, until a real estate sale closes. Also an account, maintained by a loan servicing department, which serves as a fund to pay taxes, insurance or other costs associated with real estate ownership.

Fixed-rate loan: A loan with a fixed interest rate, usually for a long-term with equal monthly payments of interest and principal until the debt is paid in full.

Floater: An amendment to an insurance policy that provides coverage for portable (hence floating) personal property, such as silverware, sporting equipment, jewelry, furs, etc.

Graduated payment loan: A loan with lower initial monthly payments which rise gradually, usually over five to ten years, then level off.

Gross income: Income before taxes and other deductions.

Growing equity loan: Also known as a rapid payoff mortgage, a loan with a fixed interest rate, but monthly payments may vary according to an agreed-upon schedule or index.

Home equity loan: A loan where you may borrow an amount of money based upon a percentage of the value of your home less other loans (mortgage etc.).

HUD: U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes.

Index: The guidelines used to set and reset an adjustable rate mortgage.

Interest: The cost of borrowing money. The interest rate on a mortgage is expressed as a percentage rate for a given time period. The rate may be fixed or variable.

Lease (or rent) option: A renter pays an "option fee" for the right to purchase the property within a specified time and at an agreed-upon price.

Lien: A claim by one person on the property of another as security for money owed. Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor.

Limited partnership: A partnership which offers some protection to its limited partners against liability. A limited partnership is controlled by one or more general partners.

Liquid assets: Cash and those assets that can easily and quickly be converted to cash, typically without significant loss of principal.

Listing agent: A real estate professional, working for a broker, who, ordinarily, will "list" the for-sale house with a Multiple Listing Service.

Lock-in rate: A lender's commitment to freeze a mortgage loan rate during loan processing.

Margin: The amount your lender adds to the stated index to compute your interest rate on an adjustable rate mortgage.

Mortgage: A type of loan in which the borrower (home buyer) pledges the property as security to the lender for repayment of the loan.

Mortgage broker: An individual or company that obtains mortgages for others by finding lending institutions to lend the money.

Mortgage commitment: A written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a home.

Mortgage life insurance: An insurance policy that guarantees repayment of the mortgage loan if the borrower dies.

Multiple listing service: A database listing information about local for-sale homes and properties that is shared among area brokers.

Net worth: The value of all your assets (what you own), minus your debts (what you owe).

Passive activity losses: An activity involving the conduct of a trade or business in which you do not materially participate. Losses from these activities generally can't offset other types of income, such as wages, interest and dividends.

Points: Prepaid interest on the amount that you borrow, generally to buy a home. The number of points you pay represents a percent of the loan.

Primary residence: The home that you maintain as your permanent domicile with the intention of always returning there.

Principal: The amount of money borrowed, excluding the interest.

Principal residence: The home that you maintain as your permanent domicile with the intention of always returning there.

Principal, interest, taxes and insurance (PITI) payment: A periodic (usually monthly) payment which includes the principal and interest payment, plus a contribution to the escrow account established by the lender to pay insurance premiums and property taxes on the mortgaged property.

Private mortgage insurance (PMI): Insurance written by a company protecting the lender against loss if the borrower defaults on the mortgage. Many lenders require PMI for conventional loans when the down payment is less than 20 percent.

Radon: An odorless radioactive gas, occurring in nature. Radon levels inside a home depend on the concentration of radon in the underlying soil. Tests are available to determine radon levels.

Rate of return: A measure of the performance of an investment expressed as a ratio of earnings to cash outlay.

Realtor: A real estate broker/agent holding an active membership with the National Association of Realtors.

Rent with option: The renter pays an "option fee" for the right to purchase the property within a specified time and at an agreed-upon price. Rent payments may or may not be applied to the sales price.

Resolution Trust Corporation (RTC): A federal corporation established to manage and sell the assets of failed savings and loan associations.

Return on equity: A measure of the performance of an investment expressed as a ratio of earnings to equity.

Selling agent: A real estate agent who works with the home buyer. Although this agent legally represents the seller, most home buyers who use a real estate agent, use a selling agent.

Shared appreciation loan: A loan with a below-market interest rate and lower monthly payments in exchange for a share of the profits when the property is sold, or on a specified date.

Survey: A map made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure that a building is actually on the land according to its legal description.

Teaser rate: A low initial mortgage rate that is actually lower than the rate at which your mortgage is written. It almost always means your interest rate will increase.

Third-party buyout: A transaction where, as part of a relocation package, a relocation service company sells your home on your behalf. Terms vary by contract and employer. You may or may not be guaranteed a set price for your home.

Title: A document that provides evidence of ownership.

Title insurance: Protection for lenders and homeowners against financial loss resulting from legal defects in the title conveying property ownership.

Title search or examination: A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims filed in the record, which would adversely affect the marketability or value of title.

Umbrella policy: A liability insurance policy that pays for claims over and above the amount covered by a primary policy, up to the limits of the umbrella policy.