Expert Advice

Glossary E-G

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earthquake insurance:
Although the West Coast is often associated with earthquakes, other areas are also prone to earthquakes. An earthquake insurance rider on a homeowners policy pays to repair or rebuild your home if it is damaged in an earthquake. If you live in an area with earthquake risk, get earthquake insurance coverage!

equity:
In the real estate world, equity refers to the difference between the market value of your home and what you owe on it. For example, if your home is worth $200,000 and you have an outstanding mortgage of $140,000, your equity is $60,000.

escrow:
Escrow is not an exotic dish; it's the holding of important documents and money (related to the purchase/sale of a property) by a neutral third party (the escrow officer) prior to the close of the transaction. After the seller accepts the buyer's offer, the buyer does not immediately move into the house. A period where contingencies have to be met or waived exists. During this period, the escrow service holds the buyer's down payment and the buyer's and seller's documents related to the sale. "Closing escrow" means that the deal is completed. Among other duties, the escrow officer makes sure that the previous mortgage is paid off, your loan is funded, and the real estate agents are paid.

Fannie Mae:
See Federal National Mortgage Association.

Federal Home Loan Mortgage Corporation (FHLMC):
The FHLMC (or Freddie Mac) is one of the best known institutions in the secondary mortgage market. Freddie Mac buys mortgages from banks and other mortgage-lending institutions and, in turn, sells these mortgages to investors. These loan investments are considered safe because Freddie Mac buys mortgages only from companies that conform to its stringent mortgage regulations, and Freddie Mac guarantees the repayment of principal and interest on the mortgages that it sells.

Federal Housing Administration mortgage (FHA):
Federal Housing Administration mortgages are marketed to people with modest means. The main advantages of these mortgages is that they require a small down payment (usually between 3 percent and 5 percent). FHA mortgages also offer competitive interest rates - typically 1/2 to 1 percent below the interest rates on other mortgages. The downside is that, with an FHA mortgage, the buyer must purchase mortgage default insurance (see private mortgage insurance).

Federal National Mortgage Association (FNMA):
The FNMA (or Fannie Mae) is one of the best known institutions in the secondary mortgage market. Fannie Mae buys mortgages from banks and other mortgage-lending institutions and, in turn, sells them to investors. These loan investments are considered safe because Fannie Mae buys mortgages only from companies that conform to its stringent mortgage regulations, and Fannie Mae guarantees the repayment of principal and interest on the loans that it sells.

fixed-rate mortgage:
The fixed-rate mortgage is the granddaddy of all mortgages. You lock into an interest rate (for example, 8.5 percent), and it never changes during the life (term) of your 15- or 30-year mortgage. Your mortgage payment will be the same amount each and every month. Compare fixed-rate mortgages with adjustable-rate mortgages.

flood insurance:
"When the flood waters recede, the poor folk start from scratch." (Richard Wright) They start from scratch unless they have flood insurance. In federally designated flood areas, flood insurance is required. If there's even a remote chance that your area may flood, having flood insurance is prudent.

foreclosure:
Foreclosure is the legal process of the mortgage lender taking possession of and selling the property to attempt to satisfy indebtedness. When you default on a loan and the lender deems that you are incapable of making payments, you may lose your house to foreclosure. Being in default, however, does not necessarily lead to foreclosure. Some lenders are lenient and help you work out a solution if they see that your problems are temporary. Foreclosure is traumatic for the homeowner and expensive for the lender.

formula:
We're not talking about baby food here. In real estate lingo, the formula is how you calculate interest rates for adjustable-rate mortgages. Add the margin to the index to get the interest rate (margin + index interest rate).

Freddie Mac:
See Federal Home Loan Mortgage Corporation.

graduated-payment mortgage:
A rare bird these days, the graduated-payment mortgage gives you the opportunity to cut your total interest costs. With a graduated-payment mortgage, your monthly payments are increased by a predetermined formula (for example, a 3 percent increase each year for seven years, after which time payments no longer fluctuate). If you expect to land a job that may allow you to make these higher payments, you may want to consider this option.

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