Mortgage Jargon

A — Z Glossary of Mortgage Terminology

 Adjustable-Rate Mortgage

A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The term “variable-rate mortgage” is most common outside the United States, whilst in the United States, “adjustable-rate mortgage” is most common. Adjustable rates transfer part of the interest rate risk from the lender to the borrower. The borrower benefits if the interest rate falls but loses if the interest rate increases.

Adverse Possession

Sometimes referred to as “Squatters Rights”  Adverse possession is a principle in real estate law that allows someone who is occupying someone else’s land without permission to claim title to that real estate after a period of time.

Affordability

The method a lender uses to determine how much you can borrow. Each Bank uses its own predefined criteria to determine how much you can afford. The affordability formula is based on income, other financial obligations and your credit score.

 Agreement in Principle (aka. Pre-qualified)

Mortgage-TerminologyAn agreement in principle is a stepping stone to a contract even if not all details are known,  in a mortgage  an Agreement in Principle or Decision in Principle is where the bank will commit to lending a certain amount of money as long as certain criteria such as property value have been met. Other criteria could be having above a certain credit score, proof of a certain income, etc.

Application Fee (aka. Booking Fee)

An application fee may be charged by a mortgage lender in order to lock in a particular interest rate. This fee is normally paid upon application to cover the costs by the lender of running a credit check and processing the application paperwork. It is typically non-refundable, but in some instances can be refunded if the mortgage lender declines an application for a mortgage.

 Appraisal Fees

Appraisal Fees are usually paid by the buyer to a licensed professional Appraiser. Many lenders will require that an appraisal be performed as a condition of the mortgage loan. The purpose of this appraisal is to verify that the sale price of the property (upon which the underwriting of the loan is based) is equal to or less than the fair market value of the property.

Arrears

Anytime you have a financial obligation such as a loan or credit card, if you miss a payment your account is considered to be in arrears. This can adversely affect your credit score and thus your ability to obtain further credit.

Borrower

The person borrowing who either has or is creating an ownership interest in the property. He will create a debt under the terms of the mortgage loan to the lender.

Balloon Payment

Sometimes in an effort to reduce monthly payments on a mortgage or other loan a balloon payment can be added to a loan. Basically this is a larger final payment than all the other payments. For instance you could borrow $150,000 for 20 years with a final balloon payment of $50,000. In effect your payment would be similar to borrowing only $100,000 (plus interest on the extra $50,000) but at the end you would owe a lump sum of $50,000. A balloon payment is generally only used if you expect interest rates to fall or you expect a windfall of money before the end of the loan. It can be risky if interest rates rise or your financial situation deteriorates.

Booking Fee

See (Application Fee)

Bridge Loan

A Bridge Loan is a sum of money obtained for a short period of time until other financing can be arranged.  Aka. Bridging Loan. There are 2 types of Bridge loans — Closed Bridging is where the loan has to be repaid by a certain date and Open Bridging where there is no specific date for repayment. Bridge loans typically carry higher interest rates than longer term financing. And are often secured through “hard money lenders.”

Building Survey or Evaluation

A building evaluation is performed by a professional investigator who assesses the condition of a building.  This will generally include a site map, and  a detailed estimate of any required repair or replacement costs. It will not normally include advice on the value of the property.

Buildings Insurance

In the U.K. Buildings Insurance protects you in the event of the structure of your home suffering damage due to a wide range of events. In the U.S. it is typically referred to as Home Owners Insurance.

Buy to Let

A Buy to Let mortgage is  a specific mortgage for a rental property.  Lenders calculate how much they are willing to lend using a different formula than for an owner-occupied property.  For an owner-occupied property, the calculation is typically a multiple of the owner’s annual income. Interest rates and down payments may be higher than on a mortgage on a home that you intend to live in. This is because borrowers tend to default on investment property before they are willing to risk losing their own home.

Capital and Interest Mortgage

A standard type mortgage where both the capital and interest are paid over the term of the mortgage resulting in the full balance being repaid by the end of the term.

Capped Rate

A capped rate is an adjustable mortgage that provides a “cap” or limit  on how high your interest rate can rise. Typically there will be a time period attached to the limit such as how much it can rise in one year and also how much it can rise total.

Cash Back Mortgage

Some mortgage lenders, especially in the United Kingdom, offer a lump sum payment to new borrowers at the beginning of a mortgage. Similar to getting cashback with your debit card purchase at the grocery store, this lump sum is not free cash, but is instead part of the mortgage interest paid by the borrower. The size of the lump sum is dependent on the size of the mortgage and is usually offered only on certain mortgages in a mortgage lender’s range. Cashback on mortgages is popular with first time buyers, who put the cashback towards buying furniture, as these types of buyers often do not have any surplus funds after paying the deposit on their new home.

Commercial Mortgage

Much like a residential mortgage, a commercial mortgage is a loan made using commercial real estate as collateral to secure repayment. The major difference is that the collateral is a commercial building or other business real estate, not residential property. In addition, commercial mortgages are typically taken on by businesses instead of individual borrowers. The borrower may be a partnership, incorporated business, or limited company, so assessment of the creditworthiness of the business can be more complicated than is the case with residential mortgages. Many commercial mortgages are non-recourse, that is, that in the event of default in repayment, the creditor can only seize the collateral, but has no claim against the borrower for any remaining deficiency.

Conveyance

This is the transfer of the legal title of land and property from one persons name to another.

Current Account Mortgage

A specific type of flexible mortgage common in the United Kingdom is an offset mortgage or current account mortgage. The key feature of an offset mortgage is the ability to reduce the interest charged by offsetting a credit balance against the mortgage debt. For example, if the mortgage balance is £200,000 and the credit balance is £50,000, interest is only charged on the net balance of £150,000. Some lenders have a single account for all transactions, this is often referred to as a current account mortgage. There can be some variation between different features of an offset mortgage and a current account mortgage.

Deeds Release Fee

A deeds release fee is often payable when your existing lender releases the title deeds as the result of final payment or transfer to another lender.  It is a small fee to cover processing costs of the deed paperwork.

Deposit on Real Estate

A potential buyer can place a deposit with the seller as “good faith money” in recognition of his intention to purchase the property and as part of a binding agreement that the seller will not sell to another buyer.

Early Repayment Charge

An early repayment or Prepayment is perceived as a risk, because mortgage debts are often paid off early in order to incur lower total interest payments through cheaper refinancing. Thus to compensate lenders charge an early repayment charge to discourage borrowers from refinancing. Most modern residential loans in the U.S. have a clause allowing prepayments without penalty.

Endowment Mortgage

An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by an endowment policies. An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on death. The phrase endowment mortgage is used mainly in the United Kingdom. In an endowment mortgage the borrower has two separate agreements. One with the lender for the mortgage and one with the insurer for the endowment policy. .

Equity (In Real Estate)

Home equity is the difference between the market value and unpaid mortgage balance on a home. Thus if the home is worth $150,000 and has a $100,000 mortgage the owner has $50,000 in home equity.

Equity Release or Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit is the result of an application with a lender to grant a line of credit based on the “equity” value of your home. You can borrow against this equity up to the limit set by the lender but you do not have to borrow it thus it is a line of credit available but without interest charges unless it is used. It can be drawn against using a special checking account or debit card.

Exchange of Contracts

In the UK exchanging contracts occurs after a solicitor has carried out all necessary searches and there is agreement to the contract terms. Once each party has signed his copy of the contract and they have been exchanged, they are binding. The contracts will include a completion date, which is the date that the property becomes yours. Any deposit needed has to be paid, at exchange of contracts and arrangements for building insurance must be made so that the property is insured from that day. Usually, the present insurer will cover this new property free of increased premium until the completion date.

Fees (Mortgage Arrangement or Administration)

Mortgage Arrangement Fee. Whilst some lenders charge an administration fee others may charge an arrangement fee. This fee is charged to cover administration and primarily the reserving of funds for fixed rate and/or discounted rate mortgages. This fee may be paid separately, added to the mortgage loan, increasing its size, or deducted from the value of loan that the lender is prepared to advance.

First Mortgage (First Charge Mortgage)

A First mortgage is  the primary mortgage on a property and has the legal right to receive payments first and has first call to foreclose on the property in the event that the borrower defaults on repayments. In the UK this is called  First Charge Mortgage. A second mortgage is eligible to receive any payments after the first mortgage is satisfied.

First Time Home Buyer Grant

Although the United States Department of Housing and Urban Development (HUD) doesn’t provide grants for first time home buyers  individual states may provide grants. A first-time home buyer grant is a grant specifically for those buying their first home — perhaps a starter home. Like other grants, the first-time buyer does not have an obligation to repay the grant. In this respect, it differs from a loan and does not incur debt or interest. There are also Disabled Veterans Grants. See First-time Buyer Mortgages for more information.

Fixed Rate Mortgage

A fixed-rate mortgage (FRM), is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float”. As a result, payment amounts and the duration of the loan are fixed and known at the beginning of the loan. The fixed monthly payment for a fixed-rate mortgage is the amount paid by the borrower every month that ensures that the entire loan is paid off in full with interest at the end of its term. Fixed rate mortgages are usually more expensive than adjustable rate mortgages. Due to the inherent interest rate risk, long-term fixed rate loans will tend to be at a higher interest rate than short-term loans.

Flexible Mortgage

The term flexible mortgage refers to a residential mortgage loan that offers flexibility in the requirements to make monthly repayments. The flexible mortgage may allow larger or smaller payments to be made without penalty.

Foreclosure

Foreclosure is the legal process in which a lender attempts to recover the balance due on a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

Freehold

In English Common Law jurisdictions a freehold is the ownership of the land and all immovable structures attached to such land. This is opposed to a leasehold in which the property reverts to the owner of the land after the lease period has expired. Immovable property includes land and all that naturally goes with it, such as buildings, trees, or underground resources, but not such things as vehicles or livestock.

Further Advance

See Equity Release

Gazumping

The term gazumping is most commonly used in the UK and Australia. Gazumping occurs when a seller (especially of property) accepts an oral offer of the asking price from one potential buyer, but then accepts a higher offer from someone else. It can also refer to the seller raising the asking price at the last minute, after previously orally agreeing to a lower one. In either case, the original buyer is left in the lurch, and either has to offer a higher price or lose the purchase.

Good Faith Estimate

A good faith estimate, referred to as a GFE, must be provided by a mortgage lender or broker in the United States to a customer, as required by the Real Estate Settlement Procedures Act (RESPA). The estimate must include an itemized list of fees and costs associated with the loan and must be provided within three business days of applying for a loan. These mortgage fees, also called settlement costs or closing costs, cover every expense associated with a home loan, including inspections, title insurance, taxes and other charges. A good faith estimate is a standard form which is intended to be used to compare different offers (or quotes) from different lenders or brokers. The good faith estimate is still only an estimate. The final closing costs may be different, however the difference can only be 10% of the third party fees. Once a good faith estimate is issued the lender/broker cannot change the fees in the origination box.

Ground Rent

Ground rent, sometimes known as a rentcharge, is a regular payment made by the owner of a leasehold property to the freeholder, as required under a lease. A ground rent is created when a freehold piece of land or a building is sold on a long lease or leases. The ground rent provides an income for the landowner.

Guarantor

A guarantor  guarantees to pay a debt if the primary debtor cannot. A guarantor is not a co-signer. A co-signer is equally liable for the debt from the start. A guarantor is only liable should all efforts to collect from the original debtor fail.

Hard Money Lenders

Hard money lenders are individuals or lending companies that offer short-term loans (also called bridge loans) that provide funding based on the value of the real estate that is being secured by the loan. Hard money lenders typically have much higher interest rates than banks because they provide quick funding and fund deals that do not necessarily conform to bank standards.

Hard money lenders may have specialized requirements on how much they will lend (loan to value), what types of real estate they will lend on (commercial, residential, multi-family, land) and minimum and maximum loan sizes.

Home Equity Loan

A home equity loan is a loan designed to tap into the difference between the loan balance on the home and the value of the home i.e. the homeowner’s “equity”. For instance if the home is worth $100,000 and $80,000 is owed to the bank the equity in the home is $20,000 or 20%. Often lenders are reluctant to allow homeowners to tap into the final 10-20% because that is their cushion against market declines. A home equity loan can be in the form of a one time loan or a home equity line of credit (HELOC) which allows frequent withdrawals and repayments using the home equity as collateral.

Homeowners Insurance

Home insurance, also commonly called hazard insurance or homeowner’s insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory. It requires that at least one of the named insureds occupies the home.

House Price Index

A House Price Index (HPI) measures the price of residential housing. Several organizations produce their own housing price index including the US Federal Housing Finance Agency which publishes the HPI inx, a quarterly broad measure of the movement of single-family house prices.  The Case-Shiller index tracks prices monthly and tracks repeat sales of houses using a modified version of the weighted-repeat sales methodology proposed by Karl Case and Robert Shiller and Allan Weiss. This means that, to a large extent, it is able to adjust for the quality of the homes sold, unlike simple averages. The CoreLogic Home Price Index, introduced in 2008, is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, including single-family attached and single-family detached homes. The CoreLogic HPI provides a multi-tier market evaluation of repeat sales transactions based on price, time between sales, property type, loan type (conforming vs. nonconforming) and distressed sales.

Interest

A financial charge for use of the lender’s money generally expressed in terms of APR or annual percentage rate. Typically, interest is calculated as either simple interest or compound interest.

Interest Only Mortgage

An interest-only loan is a loan in which, for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the interest-only term the borrower may enter an interest-only mortgage, pay the principal, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option.

In the United States, a five- or ten-year interest-only period is typical. After this time, the principal balance is amortized for the remaining term. In other words, if a borrower had a thirty-year mortgage loan and the first ten years were interest only, at the end of the first ten years, the principal balance would be amortized for the remaining period of twenty years. The practical result is that the early payments (in the interest-only period) are substantially lower than the later payments. This gives the borrower more flexibility because he is not forced to make payments towards principal. Indeed, it also enables a borrower who expects to increase his salary substantially over the course of the loan to borrow more than he would have otherwise been able to afford, or investors to generate cashflow when they might not otherwise be able to. During the interest-only years of the mortgage, the loan balance will not decrease unless the borrower makes additional payments towards principal. Under a conventional amortizing mortgage, the portion of a payment that represents principal is very small in the early years (the same period of time that would be interest-only).

In the United Kingdom in the 1980s and 1990s a popular way to buy a house was to combine an interest-only loan with an endowment policy, the combination being known as an endowment mortgage. Homeowners were told that the endowment policy would cover the mortgage and provide a lump sum in addition. Many of these endowment policies were poorly managed and failed to deliver the promised amounts, some of which did not even cover the cost of the mortgage.

Joint Ownership (Joint Tenancy)

Joint tenancy is a concept in property law which describes the various ways in which property is owned by more than one person at a time. If more than one person own the same property, they are referred to as co-owners, co-tenants or joint tenants. Most common law jurisdictions recognize tenancies in common and joint tenancies, and some also recognize tenancies by the entirety. Many jurisdictions refer to a joint tenancy as a joint tenancy with right of survivorship, and a few U.S. States treat the phrase joint tenancy as synonymous with a tenancy in common. The type of ownership determines the rights of the parties to sell their interest in the property to others, to will the property to their devisees, or to sever their joint ownership of the property.

Landlord

A landlord is the owner of a house, apartment, condominium, land or real estate which is rented or leased to an individual or business, who is called a tenant (also a lessee or renter). Other terms include lessor and owner. The term landlady may be used for female owners, and lessor applies to both genders.

Land Registry

Land registration generally describes systems by which matters concerning ownership, possession or other rights in land can be recorded (usually with a government agency or department) to provide evidence of title, facilitate transactions and to prevent unlawful disposal. The information recorded and the protection provided will vary by jurisdiction. Land registration is a matter for individual states in the USA. Thus each state will define the officials, authorities, and their functions and duties with respect to the ownership of land within that state.

Leasehold

A leasehold is a temporary ownership of a property in which a lessee or a tenant buys the right to occupy land or a building for a given length of time. A lease is a legal estate and can be bought or sold on the open market. A leasehold differs from a freehold or fee simple where the ownership of a property is purchased outright and held for an indeterminate length of time. It also differs from a tenancy where a property is let (rented) on a periodic basis such as weekly or monthly. The leaseholder has the right to remain in occupation as an assured tenant paying an agreed rent to the owner until the end of the lease period (often measured in decades or centuries), a 99 year lease is quite common.

Lender

A Lender or creditor is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is the creditor, which is the lender of property, service or money. The term creditor is frequently used in the financial world, especially in reference to short term loans, long term bonds, and mortgage loans.

Lending into Retirement

In the UK some lenders prohibit “Lending into Retirement” which is allowing a mortgage term to run after the age of retirement ( i.e. 65). Other lenders may allow it if there is proof that the borrower has sufficient pension coverage for the mortgage.

Lifetime Mortgage or Reverse Mortgage

A reverse mortgage is a form of equity release (or lifetime mortgage). It is a loan available to home owners of retirement age, enabling them to access a portion of their home’s equity. The home owners can withdraw the mortgage principal in a variety of ways including a lump sum, monthly payments, or as a revolving line of credit. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. Interest that accrues is added to the mortgage balance. A reverse mortgage may be refinanced if enough equity is present in the home, and in some cases may qualify for a streamline refinance if the interest rate is reduced.

Loan To Value Ratio (LTV)

The Loan To Value Ratio is the amount of loan borrowed divided by the overall property value. This can be expressed as a fraction or a percentage.

Mortgage

A mortgage loan is secured by real property through the use of a mortgage note. Mortgages are used to make large purchases of real estate by paying regular payments of principal and interest over a period of time, generally from 5 to 30 years. A home buyer can obtain financing (a mortgage loan) to purchase the property from a financial institution. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably. The lending institution retains the right to foreclose on the house if the buyer defaults on the mortgage.

Mortgage Administration or Application Fee

Mortgage Application Fees are paid by the buyer to the lender, to cover the costs of processing the loan application. In some cases, the buyer pays the lender prior to closing, while in other cases the fee is part of the buyer’s closing costs payable at closing.

Mortgage Broker

A mortgage broker acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses to banks or other institutions. Traditionally, banks and other lending institutions have sold and retained their own mortgages. However as markets for mortgages became more competitive and mortgages are able to be packaged into Mortgage Backed Securities (MBS) a niche developed for brokers to sell and package mortgages.

Mortgage Guarantor

See Guarantor

Mortgage Indemnity Premium

See Higher Lending Charge.

Mortgage Insurance

This type of insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan  aka. mortgage protection insurance or a mortgage guarantee.  Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK. (See: Decreasing Term Insurance)

Mortgage Rate Lock

A mortgage rate lock is a contract between a borrower and a lender that allows the borrower to “lock” in a specific interest rate. Some mortgage rate locks have a provision to reduce the locked interest rate if market interest rates fall during the lock period. This is called a “float-down option”.

Mortgage Terminology or Jargon

Words related to the mortgage industry, and buying and selling real estate.

Mortgage Offer

A mortgage offer is a formal offer of terms from a lending institution. The offer will contain all pertinent details such as the borrower’s name, the property address, the mortgage amount, interest rate, term of the mortgage, repayment terms, fees,  monthly payment, etc.

Mortgage Protection

See Mortgage Insurance

Mortgage Term

The mortgage term is the length of time contracted for in the mortgage loan agreement. Typically 30, 15 or 10 years in the U.S. and 25 years in the UK.

Negative Equity (aka. Underwater Mortgage)

Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, real estate with negative equity is often referred to as being “underwater”, and loans and borrowers with negative equity are said to be “upside down”. A fall in the market value of mortgaged real estate is the usual cause of negative equity. Negative equity can also occur when the owner obtains second-mortgage home-equity loans, causing the combined loans to exceed the home value.

No Deposit Mortgage

A no deposit mortgage or 100% mortgage is where no deposit is required as the mortgage lender will lend the entire amount of money to purchase the property. This usually occurs when the purchase price is significantly below the appraised value , so the excess value acts as the deposit. Also called a “Nothing Down” mortgage.

Non-Status Mortgage

In the UK a non-status mortgage is a mortgage where the borrowing is not dependent on the income of the applicant and the applicant states they can afford the repayments.

Offset Mortgage

(See Current Account Mortgage)

Portable Mortgages

A portable mortgage is where the lender will allow you to take a mortgage to another property without

incurring a financial penalty.

Principal

Principal is the original loan amount borrowed, which may or may not include certain other costs and origination fees. Principal can also refer to any amount still owed on a loan. As the principal is repaid, the principal balance (amount still owed) will decrease in size.

Principal, Interest, Taxes, Insurance (PITI)

In relation to a mortgage, PITI (pronounced like the word “pity”) is an acronym for a mortgage payment that is the sum of monthly principal, interest, taxes, and insurance. That is, PITI is the sum of the monthly loan service (principal and interest) plus the monthly property tax payment, homeowners insurance premium, and, when applicable, mortgage insurance premium and homeowners association fee. For mortgagers whose property tax payments and homeowners insurance premiums are escrowed as part of their monthly housing payment, PITI therefore is the monthly “bottom line” of what they call their “mortgage payment” (although more precisely it is a combined payment of mortgage, tax, and insurance).

Real Estate Agent

A real estate broker or real estate agent is a person who acts as an intermediary between sellers and buyers of real estate/real property. In the United Kingdom the term is Estate agent. Traditionally, real estate agents assisted sellers in marketing their property and selling it for the highest possible price under the best terms. In this case, the broker represents the seller and has a fiduciary duty to him. When acting as a buyer’s agent with a signed agreement they assist buyers by helping them purchase property for the lowest possible price under the best terms.

Real Estate Appraisal

Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property’s market value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently. Not only that, but every property is different from the next, a factor that doesn’t affect assets like corporate stock. Furthermore, all properties differ from each other in their location – which is an important factor in their value. This product differentiation and lack of frequent trading, unlike stocks, means that specialist qualified appraisers are needed to advise on the value of a property. The appraiser usually provides a written report on this value to his or her client. These reports are used as the basis for mortgage loans, for settling estates and divorces, for tax matters, and so on. Sometimes the appraisal report is used by both parties to set the sale price of the property appraised.

Rebuilding Cost (Replacement Cost)

The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time, according to its current worth. In the insurance industry, “replacement cost” or “replacement cost value” is one of several method of determining the value of an insured item. Replacement cost is the actual cost to replace an item or structure at its pre-loss condition. This may not be the “market value” of the item, and is typically distinguished from the “actual cash value” payment which includes a deduction for depreciation. Replacement cost coverage is designed so the policyholder will receive a new item to replace the loss of an old item.  This kind of policy is more expensive than an Actual Cash Value policy, where the policyholder will only be compensated for the depreciated value of an item that was destroyed.

Refinance (Remortgage)

Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. A loan  might be refinanced for a variety of reasons, including to take advantage of a lower interest rate, to consolidate other debt(s) into one loan, to change the term of the loan (longer of shorter), to reduce the risk (e.g. switching from a variable-rate to a fixed-rate loan), or to free up cash.

Rent to Own

Rent-to-own, also known as rental-purchase, or Rent-to-Buy is a legal arrangement where items, such as furniture, consumer electronics and home appliances, are leased in exchange for a weekly or monthly payment, with the option to purchase at some point during the agreement. Differing from traditional methods of purchase, rent-to-own transactions are not obligations to purchase, since the agreement can be terminated by the lessee at any point in time with the return of the property.

Rental Unit (or Apartment)

An apartment (in American English) or flat (common in British English) is a self-contained housing unit that occupies only part of a building. Such a building may be called an apartment building, apartment house (in American English), block of flats, tower block or high-rise. Most apartments are in buildings designed for the purpose, but large older houses are sometimes divided into apartments. In some countries the word unit is a more general term referring to both apartments and rental business suites.

Repayment Mortgage

A repayment mortgage is where both the capital and interest is paid in a monthly mortgage payment thus reducing the size of the mortgage over the term until the mortgage is completely paid off.

Replacement Value

See: Rebuilding Cost

Repossession

Under certain circumstances a lender may seize possession of a property covered by a mortgage loan; this aspect, is the primary difference between a secured loan (where repossession is possible) and a personal loan where the borrower has not provided any collateral and thus the lender has nothing to repossess.

Reverse Mortgage

A reverse mortgage is a form of equity release (or lifetime mortgage). It is a loan available to home owners of retirement age, enabling them to access a portion of their home’s equity. The home owners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or as a revolving line of credit, or some combination thereof. In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance. Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage.

Reversionary Home Income Plan

A reversionary home income plan is where the home is sold to an insurance company which pays an income to the owner. When the owner dies, the life insurance company takes ownership of the property.

Second Mortgage

A second mortgage typically refers to a secured loan (or mortgage) that is subordinate to another loan against the same property. Second mortgages are subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage. Thus, second mortgages are riskier for lenders and thus generally come with a higher interest rate than first mortgages.

In real estate, a property can have multiple loans or liens against it. The loan which is registered with county or city registry first is called the first mortgage or first position trust deed. The lien registered second is called the second mortgage. In most cases, a second mortgage takes the form of a home equity loan and the two are synonymous, from a financial standpoint.

Secured Loan

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. In the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower, for example, foreclosure of a home. If the sale of the collateral does not raise enough money to pay off the debt, the creditor may be able to obtain a deficiency judgment against the borrower for the remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected to any specific piece of property.

Self Certification (Self Cert)

A self certification mortgage is where the lender will not require any proof of salary or self employed income. Such a mortgage requires a larger deposit or equity in the property.

Short Sale

A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens’ full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.

Standard Variable Rate

The standard variable rate is the mortgage lender’s rate at which they will lend money to their customers.

Surveyor

Surveying or land surveying is the technique, profession, and science of accurately determining the terrestrial or three-dimensional position of points and the distances and angles between them. These points are usually on the surface of the Earth, and they are often used to establish land maps and boundaries for ownership or governmental purposes.

Title Deeds

The United Kingdom, England and Wales operate a ‘property register’. Title deeds are documents showing ownership, as well as rights, obligations, or mortgages on the property. Since around 2000, compulsory registration has been required for all properties mortgaged or transferred. The details of rights, obligations, and covenants referred to in deeds will be transferred to the register, a contract describing the property ownership.

Title Insurance

Title Insurance is a form of indemnity insurance which insures against financial loss from defects in title to real property. Title insurance will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate.

There are two types of policies – owner and lender. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance [a loan policy] to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance. Buyers purchasing properties for cash or with a mortgage lender often want title insurance [an owner policy] as well. A loan policy provides no coverage or benefit for the buyer/owner and so the decision to purchase an owner policy is independent of the lender’s decision to require a loan policy.

Tracker Mortgage

A tracker mortgage is a variable rate mortgage which “tracks” or “follows” an index like the Bank of England base rate. It may also track the 3 month LIBOR rate. If the base rate is raised or lowered the tracker mortgage will reflect the change in the rate.

Underwater Mortgage

Having a mortgage that is “underwater” has nothing to do with flooding or the condition of the house. It simply means that the homeowner owes more on the house than he can currently sell it for. This happens when the homeowner borrows near full value of the home and then general home valuse decline. For instance, if a home is worth $100,000 and the owner borrows $90,000 against it and then he takes a $5000 home equity loan he owes $95,000 against the home and has $5000 in equity. If home prices decline by 5% he will no longer have any equity in the home. If home prices fall more than 5%  he will have  negative equity i.e. his mortgage will be underwater. If he continues to make his home payments nothing has changed. However, if he can’t make his payments or chooses not to the lender will foreclose and may or may not be able to recover the full value of their loan.

Valuation

See “Real estate appraisal”

Variable Rate Mortgages

See “Adjustable-Rate Mortgage

Wrap Around Mortgage

A wrap-around mortgage, more-commonly known as a “wrap”, is a form of secondary financing for the purchase of real property. The seller extends to the buyer a junior (secondary) mortgage which wraps around and exists in addition to any superior mortgages already secured by the property. Under a wrap, a seller accepts a secured promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance. The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee(s). Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property. Because wraps are a form of seller financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. Unless a mortgage is “assumable” wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage.

Yield (Rental)

Rental yield is the amount of money  expressed as a percent that the landlord receives in rent during the period of one year. Thus a property worth £100,000 and rental income £8,000 would yield = 8%.

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