Real Estate Terms a

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A

Adjustable-rate Mortgage (ARM):

An Adjustable-rate Mortgage (ARM) is a mortgage loan with an interest rate subject to change over the term of the loan. The interest rate is tied to the performance of a specified market rate, such as the cost of funds index calculated by the 11th District of the Federal Home Loan Bank Board, or the yields on one-year or six-month U.S. Treasury securities. The amount of times the interest rate can change and how often it can change are usually determined at the time the loan is created. Usually there is also an interest rate maximum that is set for the loan. One thing to remember regarding adjustable rate mortgages is that even a minor increase in interest rates can greatly affect the monthly payments on a mortgage loan. For example, a 30-year mortgage on a $250,000 loan at 5.5% results in a monthly payment of $1419. If, over time, interest rates rise to 7%, the monthly payment jumps to $1663 for a difference of $244 per month or almost $3000 more per year. When reviewing an adjustable rate mortgage loan, make sure that interest rate changes and subsequent increases in monthly payments will not stretch your budget beyond its limits. The benefit of an adjustable rate mortgage is that it generally has lower fees and a lower interest rate than a fixed rate mortgage. There are also many more variations of adjustable rate mortgages, allowing borrowers more flexibility and ease when getting that first home loan. Also, if rate drop significantly, borrowers with adjustable rate mortgages will automatically benefit from a lower rate without having to refinance. Something to consider regarding adjustable rate mortgages is that if interest rates are hitting their all time lows and are expected to rise in the near future, it may be a good time to refinance to a fixed rate mortgage loan and lock in the low rate.

Amortization:

The paying down of principal over time. In a typical mortgage loan, the principal is scheduled to be paid off, or fully amortized, over the term of the loan.

B

Basis Point:

One one-hundredth of a percentage point. For example, if mortgage rates fall from 7.50% to 7.47%, then they've declined 3 basis points. A full percentage point is 100 basis points.

Bill of Lading:

The receipt for your goods and the contract for their transportation. It is your responsibility to understand the bill of lading before you sign it. If you do not agree with something on the bill of lading, do not sign it until you are satisfied that it is correct. The bill of lading is an important document. Don't lose or misplace your copy.

C

Cash-out Refi:

A refinancing of a mortgage in which the new principal (the borrowed amount) exceeds the outstanding principal of the original loan by at least 5%. In other words, the homeowner is taking equity out of the home. Of the mortgages it owned that were refinanced during the first three quarters of 2000, Freddie Mac estimates that more than 4 out every 5 were cash-out refis.

Conforming Mortgage Loan:

Any mortgage loan that's at or below the amount that Fannie Mae and Freddie Mac can purchase and/or securitize in the secondary mortgage market. For 2001, the loan limit is $275,000. In 2000, it was $252,700.

Consumer Price Index (CPI):

A measurement of the average change in prices paid by consumers of a fixed market basket of a wide variety of goods and services. The broadest, and most quoted, CPI figure reflects the average change in the prices paid by urban consumers (about 80% of the U.S. population). The so-called "core CPI" excludes the volatile food and energy sectors in an attempt to determine the underlying rate of inflation. Strictly speaking, the CPI is not a "cost of living" index because its fixed market basket does not allow for the substitution of goods and services due to price changes. The CPI is released by the Bureau of Labor Statistics in mid-month for the previous month.

Conventional Mortgage Loan:

Any mortgage loan not guaranteed or insured by the government (typically through FHA or VA programs).

Credit Rating:

A seemingly arbitrary number that determines if your money situation is healthy, in need of a little cold medicine or a full body cast.

Credit Report:

A credit report shows borrowing and repayment history. It shows the amount of an individual's past and present debts and whether any debt payments have been missed. Debts can include money owed on credit cards, auto loans, mortgages and more. Credit reports also show an individual's address history, indicating how often and to what extent a person has moved. Lenders use the credit report information to determine a loan applicant's borrowing potential and interest rate. A credit report that shows late payments on debt may cause a lender to charge a higher interest rate or not lend at all. In addition, a credit report that shows little or no history of borrowing can also raise the interest rate. Lenders prefer to see some history of borrowing and repayment rather than none at all. Three main companies track the credit histories of individuals and issue credit reports. These are Equifax, Trans Union and Experian. These companies get their information from a variety of sources including creditors and public records.

Credit Score:

A credit score is a number based on an individual's credit report that indicates overall credit risk. If a borrower has a high credit score, he or she is considered more likely to be able to pay off debt in a timely manner. A low credit score indicates higher credit risk and may cause a lender to charge a higher interest rate or not extend credit at all. The most common type is called a "FICO" score, named after the Fair Isaac Company that created it. FICO scores range from 350 to 850 with the median score falling around 720. A score above 750 gives a borrower the best chance of securing the lowest possible interest rate on a loan. High scores qualify for lower interest rates and increase the number of lenders competing to provide the loan. Components that determine an individual's credit score include their borrowing and payment history, the length of this history, the amounts currently owed, the types of credit used and the level of recent credit history.

E

Existing Home Sales:

Based on the number of closings during a particular month. Because of the one-to-two month period between a signed purchase contract and a closing, existing home sales are more influenced by mortgage rates a month or two earlier than the prevailing mortgage rate during the month of closing. New homes sold, on the other hand, are counted when the purchase contract is signed. The reported figure is generally a seasonally adjusted, annual rate. Data are released by the National Association of REALTORS® on the 25th of each month (or the following business day) for the previous month.

F

Fannie Mae and Freddie Mac:

The nation's two federally chartered and stockholder-owned mortgage finance companies. Forbidden by their charters from originating loans (that is, from providing mortgage loans on a retail basis), these two Government-Sponsored Enterprises (GSEs) purchase and/or securitize mortgage loans made by others. Due to their directive to serve low-, moderate-, and middle-income families, the GSEs have loan limits on the purchase or securitization of mortgages (in 2001, the conforming loan limit is $275,000). The difference between these two entities often comes down to size (Fannie's larger), business strategy and execution.

Federal Funds Rate:

Also known as the fed funds rate, this is the rate that banks charge each other on overnight loans made between them. These loans are generally made so that bank can cover their daily cash flow and reserve requirements. As the rate rises, banks have an increased incentive to keep more of their own cash on hand - making less money available to lend out to households and businesses. The Fed doesn't actually set the fed funds rate, which is determined by supply and demand of the funds; instead, it sets a target rate and, through its own purchases or sales of securities, affects the supply of funds.

Federal Open Market Committee (FOMC):

The arm of the Federal Reserve that sets monetary policy, the FOMC is scheduled to meet eight times a year. The 12 members of the FOMC include the seven governors of the Federal Reserve System, the president of the New York Federal Reserve Bank, and, on a rotating basis, four of the presidents of the other 11 regional Federal Reserve Banks.

Fixed-rate Mortgage (FRM):

A fixed-rate mortgage (FRM) is a mortgage loan with an interest rate that does not change over the term of the loan. At the time the loan is created, the rate is set and the borrower will not be subject to fluctuations in interest rates due to changing market and economic conditions. A fixed rate mortgage usually comes with higher fees or interest rates than an adjustable rate mortgage and is best when rates are expected to rise significantly in the future. While borrowers with fixed rate mortgages don't benefit from drops in interest rates, they still have the option of refinancing the mortgage loan to take advantage of the lower rate and reduced monthly payment. The only drawback is the cost of refinancing which should, if you are refinancing at a significantly lower rate, be offset by your savings in interest payments. To recap, the main risks of a fixed rate mortgage are higher closing costs and potential additional closing costs when the borrower refinances to take advantage of a drop in interest rates. The main benefit is the peace of mind knowing that the mortgage rate and monthly payment on your home loan will not change, even if market interest rates triple.

H

Home Equity:

Home equity is the difference between the current value of the house and the amount of money owed on the mortgage. For example, if you owe $75,000 on your mortgage, there are no other liens on the property and the current market value of your home is $125,000, then the home equity amount is 125,000 - 75,000 = $50,000. The down payment that you make when purchasing a home will provide you with some initial equity.

Home Equity Line of Credit:

A home equity line of credit (HELOC) is a loan that allows you to borrow money when you need it. The amount you can borrow is based on the appraised value of your home and you can borrow and repay as much and as often as you like. The only requirement is that you make a monthly payment to cover the cost of the interest on the amount borrowed. A home equity line of credit is like having a credit card with a low interest rate and high credit limit. Because it is secured by the value of your home, lenders can offer much lower interest rates than a standard credit card company. And your credit limit can be up to 80 percent of the appraised value of your home so you have a potentially much greater borrowing capacity.

Home Equity Loan:

A home equity loan is a loan that is secured by a home and limited by the current market value of the home and any additional liens or mortgages that exist. A home equity loan is also known as a second mortgage and home owners can sometimes borrow up to 125% of their homes appraised value. For example, if the home is worth $200,000 and there is a mortgage on the home of $150,000 with no other liens on the property, then the amount available for a home equity loan may be as much as $250,000 - $150,000 = $50,000. The full 125% of the appraised value may not be available in all cases and every lender will have unique requirements and limitations. Home equity loans are used in place of other types of loans when cash is needed for bills and other expenses because the interest is tax deductible and the interest rate is lower in many cases. Borrowers can still use the money from a home equity loan to buy cars or pay for a child's college tuition. Unlike a home improvement loan or construction loan, the money does not have to be spent on the home itself and can be used for anything the borrower wants. With home equity loans, borrowers can put their home equity to work for them by using the equity to buy income property or other sound investments. One thing to remember is that a home equity loan will reduce your equity in the home by the amount of the loan and will increase your monthly mortgage payment. As with any financial or investment decision, you should first consult with a financial advisor.

Home Improvement Loan:

A home improvement loan is money lent to a property owner for home repairs, updates or remodeling. Home improvement loans are not necessarily secured by the property they are intended for and may simply be classified as home improvement loans by the lender. These loans can be secured or unsecured and are usually short term. Home improvement loans are intended to increase the value of your home so it is important to think carefully about where best to put the money. After all, the money spent on home improvements is added to your overall cost of the home and you want to be able to recoup this cost if and when you decide to sell.

Home Loan:

A home loan is money provided to you by a bank or lending institution to pay for your home. In return, the bank holds the title to your home until you've paid back the loan plus interest. The money lent to you in a home loan is "secured" by the home itself. This means that in the event that you are unable to pay back the loan, the lending institution has the right to sell the property in order to pay back the loan in a process known as foreclosure. A home loan is also known as a mortgage and has many variations with different terms and interest rates. One of the key benefits of a home loan is that the interest paid on the loan is tax deductible. Home owners can deduct interest on up to one million dollars of their mortgage debt. This can translate into huge savings in income tax.

Homeownership Rate:

The number of households residing in their own home divided by the total number of households. Late in the month following the end of each quarter, the U.S. Census Bureau releases an estimate based on a quarterly survey. A record homeownership rate of 67.6% was reached in the fourth quarter of 2000.

House Price Index:

A quarterly measure of the change in single-family house prices. The HPI is a repeat sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties, and is based on mortgages purchased or securitized by Fannie Mae and Freddie Mac. Homes with mortgages above the Fannie/Freddie conforming loan limit (in 2001, it's $275,000) are not included in the sampling, nor are homes insured or guaranteed by the FHA, VA or other federal government entity. This index is distinct from the similarly constructed Conventional Mortgage Home Price Index published by Freddie Mac. Indexes are available for the nation, nine Census regions, each of the 50 states and the District of Columbia, and 329 Metropolitan Statistical Areas (MSAs). Released by the Office of Federal Housing Enterprise Oversight (OFHEO) on the first business days of March, June, September and December for the previous quarter.

Housing Starts:

The Census Bureau's monthly count of the number of private residential structures on which construction has started. Data for a particular month is released about two weeks into the following month. Data on permits issued is also released. The reported figure is generally a seasonally adjusted, annual rate.

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