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Glossary of Terms

ALTERNATIVE FINANCING
Mortgages at a lower than market rate, such as adjustable rate, graduated payment and buydown mortgages, and hybrid mortgages.

AMORTIZATION
In the early years of an amortized loan, almost all of the payment is applied toward interest, while in the last years of the loan, almost all of the payment is applied to reduce the principal.

ASSUMABLE LOAN
A loan that can be picked up by a subsequent buyer for a small assumption fee. It saves thousands of dollars in closing costs and loan origination fees. FHA/VA loans are assumable. Most conventional loans are not.

CLOSING COSTS & PREPAIDS
Costs paid in addition to the down payment on closing day. These items can include attorneys fees, loan origination fees, appraisal fee, credit report, document preparation, escrow fee, survey and recording fees, tax escrow, hazard insurance, flood zone certification, two months of private mortgage insurance (if down payment is less than 20 percent) and sometimes the entire first year's private mortgage insurance premium. Typically, the appraisal and credit report fees are paid at application.

DISCLOSURE
A document describing all the parameters of a mortgage loan, such as the terms, conditions, interest rate caps, A.P.R., etc.

DOWN PAYMENT
The difference between the mortgage and the lower of the purchase price or appraisal. The minimum down payment is three percent on most loans. Private mortgage insurance is required for a down payment less than 20 percent.

EARNEST MONEY
Deposit money given to the seller by the potential buyer to show that he is serious about buying the house. If the deal goes through, the earnest money is applied to the down payment. If the deal does not go through, it may be forfeited.

EQUITY
The difference between a home's fair market value and the loan amount, and/or encumbrances (such as liens or claims) against it.

INDEX
A barometer for measuring and adjusting the interest rate. A commonly used index is the Treasury bill.

LOCK-IN
The number of days a lender can guarantee interest rate and points that are agreed upon by both lender and purchaser. This may be anywhere from 30 days to 270 days.

MARKET RATE
An estimate of the average rate being charged by lenders for conventional, or FHA/VA loans.

NEGATIVE AMORTIZATION
The principal balance of the loan actually grows due to payments that are not enough to cover all the interest due. Often, negative amortization accrues during the years of a variable rate or graduated payment mortgage when the payments are less than market rate.

ORIGINATION FEE
The origination fee is what the lender charges for establishing the loan. It is included in the closing costs.

POINTS OR DISCOUNT POINTS
A point or discount point is one percent of the loan amount and is charged by the lender to issue a loan at below market rates. Points can be negotiated between buyer and seller or buyer and lender. Points charged as prepaid interest are tax deductible by the buyer based on one's tax bracket.

PREPAYMENT PENALTIES
Fees charged to a borrower who pays off his loan balance before it is due.

PRIVATE MORTGAGE INSURANCE (PMI)
On conventional financing, lenders require that the borrower purchase PMI to protect the lender against default on loans with less than a 20 percent down payment. PMI has nothing to do with homeowners insurance or credit life insurance. PMI should cost the same at all lenders.

QUALIFYING
A buyer usually must qualify for a loan. Usually, the monthly payment cannot be more than 25 percent to 28 percent of the buyer's gross monthly income and all the buyer's monthly debt cannot total more than 33 percent to 36 percent of his monthly income. Some leeway may be granted based upon prior credit history, down payment, job history, etc.

TITLE
An instrument that shows the buyer has a clear ownership of the property. A loan does not usually close until the title company has assured the lender that there are no hidden problems with a title to a piece of property.

TITLE INSURANCE
A policy required by the lender and paid for by the borrower that insures the lender clear title against future claims. Borrowers may also purchase title insurance to protect their equity.