Fall Real Estate 2007

Publication Date: Friday, October 12, 2007

What's it all mean?
From 'mortgage' to 'foreclosure,' it's important to understand terms

by Arden Pennell

While buying or selling a home isn't rocket science, it's important to share a language with the Realtors, mortgage brokers and other professionals involved in the sale.

Here's a quick glossary of handy terms:

Mortgage: Any loan for which the borrower offers real property as collateral. First mortgages finance property purchase, while second mortgages can generate funds for a variety of expenses, such as market investments or college payment.

Deed of trust: A mortgage involving a third party besides the borrower and lender, called a trustee, used by many states including California. The trustee is a neutral party, often a title insurance company, who will hold the title to the property temporarily until the loan is paid. The main difference between a mortgage and deed of trust is that the latter set-up allows foreclosure (see below) to proceed more quickly than in traditional mortgage. Deeds of trust are commonly referred to as mortgages.

Escrow: A legal arrangement where a neutral third party holds an asset until it is paid off. In a deed of trust arrangement in northern California, typically an escrow account is opened with a title insurance company, which will hold onto money and help transfer documents during the house-purchase process. An escrow officer from this company should be present when all involved parties read and sign documents.

Down payment: The portion of the property's value paid upfront by the home buyer.

Principal: The initial borrowed sum. In other words, the house cost minus the down payment. If a $100,000 house is purchased with $20,000 down, the mortgage to finance that house has $80,000 in principal.

Loan-to-Value: A ratio of the money borrowed for the mortgage to the total property value. If a home buyer wants to borrow $80,000 for a $100,000 house, the loan will be an 80,000/100,000, or 80 percent LTV loan. The higher the LTV a borrower requires, the riskier s/he may be seen by lenders.

Good credit / Bad credit: An individual's credit is basically a rating of their likeliness to pay the lender back, calculated from financial information including whether past bills and loan have been paid on time and in full.

Points: A charge a lender assesses for the service of lending money. In other words, a loan will cost the amount of that loan, plus interest, plus the service fee of points.

Fixed Rate Mortgage: A mortgage whose payments are tacked to an unchanging rate, hence the term "fixed."

Adjustable Rate Mortgage (ARM) / Hybrid ARM: A mortgage whose payments are subject to changes in interest rates. ARMs may have fixed payments for the first six months, year, or even five years, before the rate changes, and initial ARM rates are cheaper than the rates offered by fixed mortgages. A "hybrid ARM" is another name for an ARM, called so because it is a mix of fixed and variable payment periods.

Subprime mortgages / Subprime loans: ARM mortgages typically obtained by risky borrowers (often those with bad credit), whose payments start low but are then liable to increase dramatically with higher interest rates. These higher rates led many homeowners to default on payment in the past few years, one cause of the current subprime-sparked mess.

Interest-only loan: A loan for which the borrower pays off only the interest on the principal. For example, an $80,000 mortgage with a 5 percent interest rate will generate $4,000 in interest owed yearly, which a borrower may pay back without decreasing the $80,000 owed. Interest-only loans are mainly attractive for those who desire greater cash flow in the short term, perhaps to invest the money elsewhere for the time being.

Jumbo mortgage: A mortgage requiring loans above $417,000. (The number is calculated based on a price that government mortgage buyers Freddie Mac and Fannie Mae will not exceed in their purchases.)

Prepayment penalty: The charge a borrower incurs if s/he would like to refinance a mortgage, or in other words, change the terms of the mortgage, perhaps from an ARM to a fixed-rate or vice versa, before a date specified in the loan agreement initially signed.

Default: To default is to not complete a payment. Defaulting on payments hurts a borrower's credit score, and may be a sign of future short sale or foreclosure.

Short sale: When a borrower sells a property for less money than is owed on the property; for example, a house with an $80,000 mortgage is sold for $60,000. Often the last option before foreclosure.

Foreclosure: A legal proceeding when the creditor, either a bank or other lender, repossesses and sells a property for which the buyer could not pay.

Staff Writer Arlen Pennell can be e-mailed at apennell@paweekly.com.