by Ed
Wachsman This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com
This is a glossary of common terms used in loans and
lending. Please note that some of these terms may also have other meanings in
other real estate related contexts.
Editor's Note: This Glossary is a great resource, especially for
beginners. It is lengthy, so please feel free to print a copy for your own use.
1003 Application.
A loan application that is thorough and required for conforming loans. It has
become the standard application for most residential loans, even non-conforming
loans. (see definition of "conforming" below)
Acceleration. The act of a lender declaring a note immediately due and
payable before the maturity date. The right to take this action is triggered by
some violation of the terms of the loan.
Adjustable Rate Mortgage (ARM). A mortgage loan having an interest rate
that can be raised or lowered over time based on periodic changes in a monitored
index . (See definition of "index" below.)
Amortized Loan. A loan that is repaid in a series of installments each of
which contains a portion that is applied to reduce the principal amount of the
loan and a portion that is applied to pay interest. As time goes on, each
successive payment allocates a larger portion to principal reduction and a
smaller portion to interest payment until the outstanding balance is ultimately
reduced to zero. If the loan has a fixed rate of interest, each payment is the
same dollar amount throughout the course of the loan. If the loan has an
adjustable rate of interest, each payment at each particular interest rate is
the same dollar amount. For example, while the interest is 8.0%, all of the
payments on a $100,000 loan for 30 years will be $733.77. If the interest rate
changes to 9.0%, all of the payments will be $804.62 while the rate remains at
the 9.0% rate.
Annual Cap. The maximum amount the interest rate on an adjustable rate
mortgage can be raised or lowered in the course of one twelve month period. If
the interest rate at the start of the period is 8.0% and the Annual Cap is 2.0%
the interest will be adjusted no higher than to 10.0% during that period even if
the index rises over 2.0%. (see definition of "index" below)
Annual Percentage Rate (APR). A more precise description of the cost of
money which reflects not only the actual interest rate but also the cost of
certain expenses charged as part of the process of obtaining the loan. The
actual items that must be calculated into the APR are determined by the Federal
government. If the interest rate on a loan was 8.0%, the APR would typically be
somewhere around 8.3% - 9.0% depending upon what fees were charged and the
amount of each fee.
Appraised Value. There are several types of appraisal depending on the
goal. Values determined for insurance purposes typically reflect replacement
cost of the improvements. Values needed for multi-unit and commercial real
estate are primarily based on the net operating income (or the potential net
operating income) of the property. Values needed for residential real estate are
usually determined on the basis of comparable sales. (See the definitions of
comparable sales and net operating income below and see J. P. Vaughan's article
"What Is Market Value" in the How-To section of this site.)
Assumable Mortgage. An existing mortgage which allows the next purchaser
of a property to be liable for the payments and other obligations of the note
and mortgage. Depending on the type of loan, the assumption of the obligation by
this next purchaser may or may not require a qualification and approval process
and may or may not release the original mortgagor (borrower) from further
liability. A written release from the mortgagee (lender) is required to relieve
the original mortgagor of responsibility. Without a release, the original
mortgagor must make the payments (and suffer harm to a credit report if they are
not made) if the person assuming the mortgage fails to do so.
Balance. The outstanding dollar amount owed on a loan. Also referred to
as loan balance or mortgage balance.
Balloon Payment. An installment payment which is larger (most often much
larger) than the other scheduled payments. It is usually the last payment. If a
note is written for $50,000 at a fixed 9.0% rate of interest with payments based
on an amortization schedule of 30 years and a balloon payment due in 5 years,
the first 60 payments will each be $402.31 (the normal payment for a 30 year
loan at 9.0% interest) and the last payment will be $47,940.15 which will be the
outstanding balance remaining after the 60th payment.
Blanket Mortgage. A single mortgage which attaches to more than one
property. (See definition of "mortgage" below.)
Broker. An individual who acts as an intermediary between two or more
parties for the purpose of negotiating a transaction agreeable to all of the
parties. In lending, the broker arranges and negotiates loan amounts, interest
rates and loan terms between borrowers and lenders. Depending on the type of
loan, the state wherein the transaction is occurring and contractual
arrangements, the broker may represent the borrower, the lender or not have a
fiduciary responsibility to either. (See definition of "fiduciary
responsibility" below.)
Buy Down. A payment of discounts points in exchange for a lower rate of
interest. It has the effect of providing the lender with a greater yield today
in exchange for a lower yield in the future. (See definition of "discount
points" below.)
Cash Flow. The net operating income minus the total of all debt service
payments. (See definition of "net operating income" below.)
Cash Out. Cash given to the borrower from the proceeds of a loan. While
relatively common as part of a refinance, it is uncommon, but not impossible, as
a benefit of a small percentage of non-conforming loans used for a purchase.
Closing. The formal meeting where loan documents are signed and funds
disbursed. Note, however, that Federal law requires that funds not be disbursed
for three business days on certain loans where personal residences serve as the
security. (See definition of "rescission" below.)
Closing Costs. The expenses which borrowers incur to complete the loan
transaction. These costs may include title searches, title insurance, closing
fees, recording fees, processing fees and other charges.
Combined Loan-to-Value (CLTV). The total of all loans relative to the
value of the property. If a property has a value of $100,000 and three loans
totaling $125,000, the CLTV is 125% ($125,000 / $100,000).
Commitment. The notification that a lender has approved a loan. Virtually
all commitments are issued conditionally; that is, subject to some list of
conditions that must be satisfied prior to funding actually taking place.
Typical conditions include appraisals of a certain value, clean title,
verification of representations by
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