Expert Advice

Glossary A-D

Terms: A-D | E-G | H-L | M-P | Q-Z

acceleration clause:
Watch out for an acceleration clause in your mortgage contract. This provision gives the lender the right to demand payment of the entire outstanding balance if you miss a monthly payment, sell the property, or otherwise fail to perform as promised under the terms of your mortgage. (See also due-on-sale clause.) Ouch!

adjustable-rate mortgage (ARM):
An adjustable-rate mortgage is a mortgage whose interest rate and monthly payments vary throughout its life. ARMs typically start with an unusually low interest rate (see teaser rate) that gradually rises over time. If the overall level of interest rates drops, as measured by a variety of different indexes (see index), the interest rate of your ARM generally follows suit. Similarly, if interest rates rise, so does your mortgage's interest rate and monthly payment. The amount that the interest can fluctuate is limited by caps (see also periodic caps and lifetime caps). Before you agree to an adjustable-rate mortgage, be sure that you can afford the highest payments that would result if the interest rate on your mortgage increased to the maximum allowed.

adjusted cost basis:
For tax purposes, the adjusted cost basis is important when you sell your property, because it allows you to determine what your profit or loss is. You can arrive at the adjusted cost basis by adding the cost of the capital improvements that you've made to the home to the price that you paid for the home. Capital improvements increase your property's value and its life expectancy.

adjustment period or adjustment frequency:
This term has nothing to do with the first few weeks after you've broken up with your sweetheart; it refers to how often the interest rate for an adjustable-rate mortgage changes. Some adjustable-rate mortgages change every month, but it is more typical to have one or two adjustments per year. The less frequently your loan rate shifts, the less financial uncertainty you may have. But less frequent adjustments in your mortgage rate mean that you will probably have a higher teaser or initial interest rate. (The initial interest rate is also called the "start rate.")

annual percentage rate (APR):
This figure states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points, and any other add-on loan fees and costs. The APR is thus invariably higher than the rate of interest that the lender quotes for the mortgage.

appraisal:
You must pay for the mortgage lender to hire an appraiser to give an "opinion of value" (that is, the appraiser gives a measure of the market value) of the house you want to buy. This professional opinion helps to protect the lender from lending you money on a home that is worth less than what you've agreed to pay for it. For typical homes, the appraisal fee is in the $200 to $300 range.

appreciation/depreciation:
Appreciation refers to the increase of a property's value. Depreciation (the reverse of appreciation) is when a property's value decreases.

arbitration of disputes:
A method of solving contract disputes which is generally less costly and faster than going to a court of law. In arbitration, buyers and sellers present their differences to a neutral arbitrator who, after hearing the evidence, makes a decision that resolves the disagreement. The arbitrator's decision is final and may be enforced as if it were a court judgment. Consult a real estate lawyer if you are ever a party in an arbitration. (Also see mediation.)

assessed value:
The assessed value is the value of a property (according to your local county tax assessor) for the purpose of determining your property taxes.

assumable mortgage:
Some mortgages allow future buyers of your home to take over the remaining loan balance of your mortgage. If you need to sell your house but interest rates are high, having an assumable mortgage may be handy. You may be able to offer the buyer your assumable loan at a lower interest rate than the current going interest rate. Most assumables are adjustable-rate mortgages - fixed-rate, assumable mortgages are nearly extinct these days because lenders realize that they lose a great deal of money on these types of mortgages when interest rates skyrocket.

balloon loans:
These loans require level payments just as a 15- or 30-year fixed-rate mortgage does. But well before their maturity date (the date when they'd be paid off) - typically three to ten years after the start date - the full remaining balance of the loan becomes due and payable. Although balloon loans can save you money because they charge a lower rate of interest relative to fixed-rate loans, balloon loans are dangerous. Being able to refinance a loan is never a sure thing. Beware of balloon loans!

bridge loan:
If you find yourself in the inadvisable situation where you have closed on a new home before you have sold your old one, you may need a short-term bridge loan that enables you to borrow against the equity that is tied up in your old home until your old home sells. We say "bridge" because such a loan is the only thing keeping you above water financially during this period when you own two houses. Bridge loans are expensive compared to other alternatives, such as using a cash reserve, borrowing from family or friends, or using the proceeds from the sale of your current home. In most cases, you need the bridge loan for only a few months in order to tide you over until you sell your house. Thus, the loan fees can represent a high cost (about 10 percent of the loan amount) for such a short-term loan.

broker:
Real estate brokers are one level higher on the real estate professional totem pole than real estate agents (or salespeople). Real estate agents cannot legally work on their own - they must be supervised by a broker. To become a broker in most states, a real estate salesperson must have a number of years of full-time real estate experience, meet special educational requirements, and pass a state licensing exam. See also real estate agent and Realtor.

buydown:
A buydown is a Veterans Administration loan plan that is available only in some new housing developments and is aimed at veterans with low or modest incomes. Buydown simply means that a builder agrees to pay part of the homebuyer's mortgage for the first few years. Sellers also sometimes do interest rate buydowns to create attractive financing for buyers of their houses by paying lenders a predetermined amount of money so lenders will reduce their mortgage interest rates.

buyer's brokers:
Historically, real estate brokers and agents worked only for sellers. The buyer's broker only owes allegiance to the buyer and does not have an agent relationship with the seller. Although this may be viewed as an improvement for all the buyers in the world, don't be too ecstatic. Buyer's brokers are still paid on commission when you buy, so don't expect them to be supportive of you if you habitually lollygag. Also keep in mind that the higher the purchase price of the house, the more money the buyer's broker makes.

capital gains:
For tax purposes, a capital gain is the profit that you make when you sell a home. For example, if you buy a home for $125,000 and then (a number of years later) you sell the house for $175,000, your capital gain is $50,000. You can avoid paying tax on this profit by purchasing another home that costs at least as much as the one that you sold, but you must buy the new home within two years of the sale of the home that you previously owned.

capital gains rollover:
Capital gains rollover is not a passing dance fad. Instead, capital gains rollover refers to certain tax privileges you have if and when you sell, for a profit, the house that is your primary residence. If you have a capital gain when selling your primary residence, you can roll over (or defer) paying tax on the profit if you buy a new home of equal or greater value within two years before or after the sale of your previous house.

caps:
Real estate caps having nothing to do with dental work. There are two different types of caps for adjustable-rate mortgages. The life cap limits the highest or lowest interest rate that is allowed over the entire life of your mortgage. The periodic cap limits the amount that your interest rate can change in one adjustment period. A one-year ARM, for example, may have a start rate of 7.5 percent with a + or - 2 percent periodic adjustment cap and a 6 percent life cap. On a worst-case basis, the loan's interest rate would be 9.5 percent in the second year, 11.5 percent in the third year, and 13.5 percent (7.5 percent start rate plus the 6 percent life cap) forevermore, starting with the fourth year.

cash reserve:
Most mortgage lenders require that homebuyers have sufficient cash left over after closing on their home purchase in order to make the first two mortgage payments or to cover a financial emergency.

closing costs:
After you've passed every home-buying obstacle and reached the safe clearing in order to buy your home, one final potential land mine appears in the form of closing costs. These costs generally total from 2 percent to 5 percent of the home's purchase price and are completely independent of (and in addition to) the down payment. Closing costs include such things as points (that is, loan origination fee to cover lender's administrative costs), an appraisal fee, a credit report fee, mortgage interest for the period between the closing date and the first mortgage payment, homeowners insurance premium, title insurance, pro-rated property taxes, and recording and transferring charges. So when you are finally ready to buy, you need to have enough cash to pay all these costs in order to buy your dream home.

commission:
The commission is the percentage of the selling price of a house that is paid to the real estate agents and brokers. Because most agents and brokers are paid by commission, understanding how the commission can influence the way that agents and brokers work is important for homebuyers. Agents and brokers make money only when you make a purchase, and they make more money when you make a bigger purchase. Choose an agent carefully and take your agent's advice with a grain of salt because this inherent conflict of interest can often set an agent's visions and goals at odds with your visions and goals.

community property:
Along with joint tenancy and tenancy-in-common, community property is a way that married couples may take title to real property. Community property offers two major advantages over joint tenancy and tenancy-in-common. First, community property ownership allows spouses to transfer interests, by Will or otherwise, to whomever they wish. The second advantage of holding title to a home in community property is that the surviving spouse gets favorable tax treatment. The market value of the entire house as of the spouse's date of death (such market value is also called the house's "stepped-up basis") is used rather than the house's original cost, which reduces the taxable profit (assuming that the home has appreciated in value) when the house is sold.

comparable market analysis (CMA):
Buying a Ford Taurus from the first dealer that you visit would be impulsive and foolish. You need to shop around to find out where the best deal on that type of car is. The same is true with home buying. If you are interested in buying a home, you need to find out how much money houses in the area have been selling for. You must identify "comparable" homes that have sold within the last six months, are in the immediate vicinity of the home that you desire to purchase, and are as similar as possible to the one that you're interested in buying in terms of size, age, and condition. You must do the same thing for comparable houses currently on the market to see if prices are rising, flat, or falling. A written analysis of comparable houses currently being offered for sale and comparable houses sold in the past six months is called a comparable market analysis (CMA).

condominiums:
Condominiums are housing units that are contained within a development area in which you own your actual unit and a share of everything else in the development (lobby, parking areas, land, and the like, which are known as common areas). Condominiums are a less-expensive form of housing than single-family homes are. For this reason, condominiums are mistakenly seen as good starter houses. Unfortunately, condominiums generally don't increase in value as rapidly as single-family houses do because the demand for condos is lower than the demand for houses. And, because condominiums are far easier for builders to develop than single-family homes are, the supply of condominiums often exceeds the demand for them.

contingencies:
Contingencies are conditions contained in almost all home purchase offers. The seller or buyer must meet or waive all contingencies before the deal can be closed. These conditions are related to such things as the buyer's review and approval of property inspections or the buyer's ability to get the mortgage financing that is specified in the contract.

convertible adjustable-rate mortgages:
Unlike conventional adjustable-rate mortgages, convertible adjustable-rate mortgages give you the opportunity to convert to a fixed-rate mortgage, usually between the 13th to 60th month of the loan. For this privilege, convertible adjustable-rate mortgage loans have a higher rate of interest than conventional adjustable-rate mortgages, and a conversion fee (which can range from a few hundred dollars to one percent or so of the remaining balance) is charged. Additionally, if you choose to convert to a fixed-rate mortgage, you will pay a slightly higher rate than what you can get by shopping around for the best rates available at the time you convert.

cooperatives (co-ops):
Cooperatives are apartment buildings where you own a share of a corporation whose main asset is the building that you live in. In high-cost areas, cooperatives (like their cousins, condominiums and townhouses) are cheaper alternatives to buying single-family houses. Unfortunately, cooperatives also resemble their cousins in that they generally lag behind single-family homes in terms of appreciation. Co-ops are also, as a rule, harder to sell and obtain loans for than condominiums.

cosigner:
If you have a checkered past in the credit world, you may need help securing a mortgage, even though you are financially stable. A friend or relative can come to your rescue by co-signing (which literally means being indebted for) a mortgage. A cosigner cannot improve your credit report but can improve your chances of getting a mortgage. Cosigners should be aware, however, that co-signing for your loan will adversely affect their future creditworthiness since your loan becomes what is known as a contingent liability against their borrowing power.

cost basis:
See adjusted cost basis.

covenants, conditions, and restrictions (CC&Rs):
CC&Rs establish a condominium by creating a homeowners association, by stipulating how the condominium's maintenance and repairs will be handled, and by regulating what can and can't be done to individual units and the condominium's common areas. These restrictions may apply to lawn maintenance, window curtain colors, and the like. Some CC&Rs put community decision-making rights into the hands of a homeowners association.

credit report:
A credit report is the main report that a lender uses to determine your creditworthiness. You must pay for the lender to obtain this report, which the lender uses to determine your ability to handle all forms of credit and to pay off loans in a timely fashion.

debt-to-income ratio:
Before you go out home buying, you should determine what your price range is. Lenders generally figure that you shouldn't spend more than about 33 to 40 percent of your monthly income for your housing costs. The debt-to-income ratio measures your future monthly housing expenses, which include your proposed mortgage payment (debt), property tax, and insurance, in relation to your monthly income.

deed:
A deed is the document that conveys title to real property. Before you receive the deed, the title insurance company must receive the mortgage company's payment and your payments for the down payment and closing costs. The title insurance company must also show that the seller holds clear and legal title to the property for which title is being conveyed.

default:
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 house.

delinquency:
At first you are delinquent; then you are in default. Delinquency occurs when a monthly mortgage payment is not received by the due date.

down payment:
The down payment is the part of the purchase price that the buyer pays in cash, up front, and does not finance with a mortgage. Generally, the larger the down payment, the better the deal that you can get on a mortgage. You can usually get access to the best mortgage programs with a down payment of 20 percent of the purchase price of the home.

due-on-sale clause:
A due-on-sale clause contained in the mortgage entitles the lender to demand full payment of all money due on your loan when you sell or transfer title to the property.

Terms: A-D | E-G | H-L | M-P | Q-Z