Glossary
Need help understanding the terminology of mortgages? We’ve got you.
1031 Exchange
Also referred to as a nontaxable sale, a 1031 exchange is a method enabling property owners to trade an investment property for another investment property (or properties) without paying capital gain taxes on the transaction.
Amortization
Amortization is the gradual repayment of a loan over time through regular payments that include both the principal (the borrowed amount) and the interest. Initially, payments primarily cover interest costs, with more applied to the principal as the loan progresses. This structured approach ensures the loan is fully paid off by the end of its term, helping borrowers manage their financial obligations effectively.
Appraisal
A property appraisal is an opinion of value based on factual analysis, conducted by a licensed appraiser, and includes a detailed examination of the property's location, condition, size and recent comparable sales.
When buying a home, the lender will typically require an appraisal to ensure the property's value aligns with the loan amount. As an example, the appraiser might determine a 3-bedroom house's value at $300k by comparing it to similar homes that recently sold in the area.
Appraisals are essential in the mortgage process as they influence the loan-to-value (LTV) ratio, ensuring the lender doesn’t lend more than the property’s worth. They also provide buyers with a professional estimate of the property's value, aiding in negotiations and financial planning.
Appraisal Methods
Generally, there are three major methods—cost approach, income approach, and market value (comparable) approach.
Appreciation
An increase in value of real estate.
Closing
The final settlement of real estate transactions between buyer and seller.
Condominium
A system of individual fee ownership of units combined with joint ownership of a common area of the structure and land.
Conventional Loan
A mortgage securing a loan made by investors without governmental underwriting, i.e., which is not FHA insured or VA guaranteed.
Counter Offer
A rejection of an offer by a seller along with an agreement to sell the property to the potential buyer on terms differing from the original offer.
Deed
Written instrument which, when properly executed and delivered, conveys title.
Discount Points
Additional charges made by a lender at the time a loan is made. Points are measured as a percent of the loan, with each point equal to one percent.
Earnest Money Deposit
Down payment made by buyer as evidence of good faith.
Easement
Created by grant or agreement for a specific purpose, such as an electrical line by a power company, or a shared driveway. An easement is the right, privilege, or interest which one party has in the land of another.
Equity
The interest or value which an owner has in real estate over and above the liens against the real property.
Escrow
The deposit of instruments and funds with instructions to a third neutral party (the escrow) to carry out the provisions of an agreement or contract.
Federal Housing Administration (FHA) Loan
A loan which has been insured by the federal government guaranteeing its payment in case of default by the owner.
Farmers Home Administration (FmHA) Loan
A loan by the federal government similar to an FHA loan usually used for residential property in rural areas.
Impound Account
An account held by the lender for payment of taxes, insurance, or other periodic debts against real property.
Joint Tenancy
Joint ownership by two or more persons with right of survivorship; all joint tenants own equal interest and have equal rights in the property.
Lien
A form of encumbrance which usually makes property security for the payment of a debt of discharge of an obligation. Example: judgments, taxes, mortgages, deeds of trust, etc.
Loan-to-Value
The Loan-to-Value (LTV) ratio is a key metric used by lenders to assess the risk of a mortgage loan. It is calculated by dividing the loan amount by the appraised value of the property. For example, if borrowing $180,000 to purchase a home appraised at $200,000, your LTV ratio would be 90%. The higher the LTV ratio, the greater the risk for the lender.
A lower LTV ratio often means better loan terms and lower interest rates, as it indicates to the lender that the borrower has more equity in the property.
Marketable Title
Merchantable title, or title free and clear of objectionable liens or encumbrances.
Mortgage
An instrument recognized by law by which property secures the payment of a debt or obligation.
Mortgage Insurance
Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default, thus enabling the lender to lend a higher percentage on the sale price.
Origination Fee
A fee charged by the lending institution.
Personal Property
Any property which is not real property, e.g., money, savings accounts, appliances, cars, boats, etc.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) is a form of mortgage insurance that is typically required when obtaining a conventional loan with a down payment of less than 20% of the property’s purchase price. PMI serves to protect the lender in the event of loan default, providing added security for mortgage providers.
Although this is a temporary additional payment for buyers, it also allows them to purchase a home — and start building equity — much more quickly.
Additionally, a borrower can request for PMI to be canceled when they’ve achieved 20% equity in the home and have lived in it for several years.
Purchase Agreement
An agreement between a buyer and seller for the purchase of real estate.
Quitclaim Deed
A deed operating as a release, e.g., a husband quitclaiming to wife.
Real Property
Land and whatever by nature or artificial annexation is a part of it.
Special Assessment
Legal charge against real estate by a public authority to pay the cost of public improvements such as street lights, sidewalks, street improvements, etc.
Subdivision
A parcel of land that has been divided into smaller parts.
Term of Mortgage
The period during which a mortgage must be paid.
Trust Account
An account separate and apart from a broker's own account, and in which the broker is required by law to deposit all funds collected for clients.
VA Loan
A loan guaranteed by the Veterans Administration.
Warranty Deed
A deed used to convey real property which contains warranties of title and quiet possession, where the grantor agrees to defend the premises against the lawful claims of third persons.
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