Expert Advice

Glossary H-L

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home-equity loan:
A home-equity loan is technical jargon for what used to be called a second mortgage. With this type of loan, you borrow against the equity in your house. If used wisely, a home-equity loan can help people pay off high-interest consumer debt, which is usually at a higher interest rate than a home-equity loan and is not tax-deductible; or a home-equity loan can be used for other short-term needs, such as for payments on a remodeling project.

homeowners insurance:
Required and necessary. No ifs, ands, or buts about it; you need "dwelling coverage" that can cover the cost to rebuild your house. The liability insurance portion of this policy protects you against accidents that occur on your property. Another essential piece is the personal property coverage that pays to replace your lost worldly possessions and usually totals 50 to 75 percent of the dwelling coverage. Finally, get flood or earthquake insurance if you are in an area susceptible to these natural disasters. As with other types of insurance, get the highest deductibles with which you are comfortable.

home warranty plan:
A home warranty plan is a type of insurance that covers repairs to specific parts of the home for a predetermined time period. Because home warranty plans typically cover small-potato items, such plans are not worth buying. Instead, spend your money on a good house inspection before you buy the home in order to identify any major problems (electrical, plumbing, or structural).

house inspection:
Like homeowners insurance, we think that a house inspection is a necessity. The following should be inspected: overall condition of the property, inside and out; electrical, heating, and plumbing systems; foundation; roof; pest control and dry rot; and seismic/slide risk. A good house inspection can save you money by locating problems. With the inspection report in hand, you can ask the seller to either do repairs or reduce the purchase price. Hire your own inspectors. Never be satisfied with a seller's inspection reports.

hybrid loans:
Combining the features of fixed-rate and adjustable-rate mortgages is the objective of hybrid loans. The initial interest rate for a hybrid loan may hold at the same rate for the first three to ten years of the loan (as opposed to only six to twelve months for a standard adjustable-rate mortgage), and then the interest rate adjusts biannually or annually. Remember that the longer the interest holds at the same initial rate, the higher the interest rate will be. These hybrid loans are best for people who plan to own their house for a short time (fewer than ten years) and who do not like the volatility of a typical adjustable-rate mortgage.

index:
The index is the measure of the overall level of interest rates that the lender uses as a reference to calculate the specific interest rate on an adjustable-rate loan. The index plus the margin is the formula for determining the interest rate on an adjustable-rate mortgage. One index used on some mortgages is the six-month treasury bill. If the going rate for these treasury bills is 5.5 percent and the margin is 2.5 percent, your interest rate would be 8 percent. Other common indices used are certificates of deposit index, 11th District Cost of Funds index, and LIBOR index.

interest rate:
Interest is what lenders charge you to use their money. The higher the rate of interest, the higher the risk. For fixed-rate mortgages, remember that the interest rate has a seesaw relationship with the points. A high number of points is usually associated with a lower interest rate, and vice versa. For an adjustable-rate mortgage, make sure that you understand the formula (the index plus the margin) that determines how the interest rate is calculated after the teaser rate expires.

investment property:
Real estate is a good long-term investment - it has produced returns similar to those from diversified stock portfolios over the years. In practice, investment in real estate is different from investment in stocks. You can also leverage your real estate investment - that is, you can make a profit on your investment as well as on borrowed money. Investing in real estate is time intensive (although investing in stocks can be, too, if you don't use a professional money manager). You also need to be adept at managing people and money if you are to bear fruit with real estate investments. One drawback of investment property is that you cannot shelter your investment-property profits in a retirement account the way you can shelter profits earned through stock investments.

joint tenancy:
Joint tenancy is a form of co-ownership that gives each tenant equal interest and rights in the property, including the right of survivorship. At the death of one joint tenant, ownership automatically transfers to the surviving joint tenant. This form of ownership is most appropriate for unmarried people in a long-term relationship. Some of the limitations of joint tenancy are (first) that each person must own an equal share of the house and (second) the right of survivorship is terminated if one person transfers his deed from joint tenancy to tenancy-in-common.

late charge:
A late charge is a fee that is charged if a mortgage payment is received late. A late charge can be steep - as much as 5 percent of the amount of your mortgage payment. Ouch! Get those payments in on time!

lease-option:
A lease-option is something of which syndicated real estate columnist Robert J. Bruss is a big fan. A property that you can lease with an option to purchase at a later date has a lease-option contract. These contracts usually require an up-front payment (called "option consideration") to secure the purchase option. The consideration is usually credited toward your down payment when you exercise your option to buy the home. An important factor in a lease-option agreement is what portion of the monthly rent payments (typically one-third) is applied toward the purchase price if you buy. You'll usually pay a slightly higher rent because of the lease-option privilege.

leverage:
Leverage refers to exerting great influence with little effort. Buying a house allows you to leverage your cash in two ways. Suppose, for example, that you make a 20 percent down payment on a $100,000 house - thus investing $20,000. The first leverage is that you control a $100,000 property with $20,000. If your house appreciates to a value of $120,000, you've made a $20,000 profit on a $20,000 investment - a 100-percent return thanks to leveraging. However, leverage works both ways, so if your house depreciates. . . .

lien:
A lien is a legal claim against a property for the purpose of securing payment for work performed and money owed on account of loans, judgements, or claims. Liens are encumbrances, and they need to be paid off before a property can be sold or title can be transferred to a subsequent buyer. The liens that exist on a property for sale appear in a property's preliminary title report.

life cap:
The total amount that your adjustable-rate mortgage interest rate and monthly payment can fluctuate up or down during the duration of the loan is determined by the life cap. The life cap is different from the periodic cap that limits the extent to which your interest rate can change up or down in any one adjustment period.

liquidated damages:
In most real estate contracts, buyers and sellers may agree at the beginning of the transaction regarding how much money would be awarded to one party if the other party violates the terms of the contract without good cause. Liquidated damages confines and defines how much money the injured party may recover. Buyers, for example, generally limit their losses to the amount of their deposit. You should discuss the advisability of using the liquidated damages provision with a lawyer or real estate agent.

lock-in:
A lock-in is a mortgage lender's commitment and written agreement to guarantee a specified interest rate to the homebuyer, provided that the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing. Most lenders will not lock-in unless you have made an offer on the property and the property has been appraised. For the privilege of locking in the rate in advance of the closing of a loan, you may pay a slight interest rate premium.

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