Real Estate Glossary & Terms

Acceleration clause: A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Appraisal: The process of valuing property. What would a willing buyer pay a willing seller for the property?

Balloon mortgage: A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.

Biweekly mortgage: A mortgage in which you make payments every two weeks instead of once a month. The basic result is that instead of making twelve monthly payments during the year, you make thirteen. The extra payment reduces the principal, substantially reducing the time it takes to pay off a thirty year mortgage. Note: there are independent companies that encourage you to set up bi-weekly payment schedules with them on your thirty year mortgage. They charge a set-up fee and a transfer fee for every payment. Your funds are deposited into a trust account from which your monthly payment is then made, and the excess funds then remain in the trust account until enough has accrued to make the additional payment which will then be paid to reduce your principle. You could save money by doing the same thing yourself, plus you have to have faith that once you transfer money to them that they will actually transfer your funds to your lender.

Bridge loan: For people who must buy a new home before selling their old one. “Home Buying for Dummies" calls this an “inadvisable situation." A bridge loan lets you borrow against the equity in your old home until it sells; but the fees for these loans can be steep because you only need the money for a few months.

Cash-out refinance When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a "cash out refinance."

Cash reserve: A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.

Commitment letter: A former offer by a lender stating the terms under which it agrees to loan money to a borrower.

Delinquency and default: At first you are delinquent; then you are in default. Delinquency occurs when a monthly mortgage payment is not received by the due date. Default is the failure to make your monthly mortgage payments on time. You are officially in default when you have missed two or more monthly payments. Default also refers to other violations of the mortgage terms. Default can lead to foreclosure on your home.

Effective age: An appraiser’s estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.

Equity: The interest or value that the owner has in a piece of real estate over and above the liens against it. For example, if a property owner owes $60,000 on a mortgage for a home valued at $100,000, she has $40,000 in equity.

Escrow: Escrow is a legal arrangement in which an asset (often money, but sometimes other property such as art, a deed of title) is delivered to a third party to be held in trust until a contingency or conditions of the sale are fulfilled. After the terms of the deal are met, the escrow agent will deliver the asset to the proper recipient.

Escrow account: Once you close your purchase transaction, you may have an escrow account or impound account with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner’s insurance when they come due. The lender pays them with your money instead of you paying them yourself.

FICO score: Fair, Isaac & Company credit-scoring system used by many lenders to determine a borrower‘s ability to repay a mortgage. FICO scores range from 300 to 850 - the lower the score, the higher risk. You can check your FICO score through the three major credit rating agencies - Equifax, Trans Union and Experian.

Flip: To buy and sell a property almost immediately, within days or hours, for a quick profit.

Home Equity Conversion Mortgage (HECM): Usually referred to as a reverse annuity mortgage, what makes this type of mortgage unique is that instead of making payments to a lender, the lender makes payments to you. It enables older home owners to convert the equity they have in their homes into cash, usually in the form of monthly payments. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property.

Homeowner's warranty: A type of insurance often purchased by homebuyers that will cover repairs to certain items, such as heating or air conditioning, should they break down within the coverage period. The buyer often requests the seller to pay for this coverage as a condition of the sale, but either party can pay.

Lease option: An alternative financing option that allows home buyers to lease a home with an option to buy. Each month's rent payment may consist of not only the rent, but an additional amount which can be applied toward the down payment on an already specified price.

Lien: A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.

Multiple listing service: A central database of most, if not all, of the homes listed for sale by all members of the multiple listing service, or MLS, within a certain geographic region. For example, the Cape Cod & Islands Multiple Listing Service serves local real estate agents and their clients.

Negative amortization: Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called "deferred interest." The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.

Overage: In leases for retail stores, the over is the amount to be paid, based on gross sales, over the base rent. This comes into play with a percentage lease, in which the rental fee is based on a percentage of the volume of sales made upon the leased property. It usually stipulates a minimum rent.

PITI: Stands for principal, interest, taxes and insurance - all the components of a monthly mortgage payment.

Private mortgage insurance: Commonly referred to as PMI, private mortgage insurance protects the bank, or mortgage lender, in the event that a buyer defaults on mortgage payments. PMI is required if the buyer is not making a down payment of at least 20 percent of the sale price. It is not a permanent cost, however. The Homeowner‘s Protection Act of 1998 stipulates that PMI should be canceled once the debt is less than 80 percent of the home‘s value.

Quitclaim deed: This is a device often used to deal with title problems. Anyone with a potential claim against the property can sign it, thereby releasing rights he or she might have had, although this alone isn‘t enough to ensure a clear title for the new owner.

Real property: Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof.

Right of first refusal: A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.

Tenancy in common: This arrangement allows each owner in a joint purchase to have separate legal title to an undivided interest in the property, and each is allowed to independently sell, mortgage, or give away his interest. The agreement should specify the percentage of ownership interest each person has.

Title insurance: Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.