Glossary of common terms used during the mortgage process
By: Michael Challiner
APR – This stands for Annual Percentage Rate. It enables you to compare the full cost of the mortgage. Rather than just being an interest rate, it includes up front and ongoing costs of taking out a mortgage. The formula for calculating APR is set by Government Regulations and therefore enables direct comparison of the cost of mortgages.
Capital and Interest Mortgage – This is when part of your monthly payment contributes to paying off the outstanding mortgage in addition to paying the interest on the mortgage. The payments are structured so that at the end of the term, your mortgage will have been completely paid off. For this reason this type of mortgage is also called a Repayment Mortgage.
Capped Rate – This is a mortgage where the lender agrees that the interest charged will never exceed a specific percentage. This deal lasts for a set period of years. After the set period, the rate usually reverts to the lenders standard variable rate. During the capped period, the interest charges can move up and down with the lenders interest rate – but cannot exceed the capped rate.
Cashback – An amount, either fixed or a percentage of a mortgage, which you can opt to receive when you complete your mortgage. The lender may well claw back this money through a higher interest rate.
CAT marks/standards – CAT stands for Fair Charges, Easy Access and decent Terms. They were created by the Government in an attempt to provide consumers with simple, clear financial products with straightforward, easy to understand terms. A CAT mortgage will have no arrangement fees, no redemption fees and will have interest calculated daily. It will also have a minimum loan of just £5000, offer you repayment flexibility and the mortgage should be portable should you move home. Finally, you will not have to buy the lender’s insurance products and there will be no penalties should you find yourself in arrears but can subsequently catch up.
Completion – This is end of the house buying process, when the funds are transferred and the keys are handed over. Happy moving!
Contract – A contract is a binding agreement between the buyer and seller. In the context of house buying, after the contract is signed by both the buyer and the seller it is then ‘exchanged’ between the respective solicitors for a set completion date. At that point, the contract is legally binding on both parties.
Conveyancing – This is the legal process in which property is bought and sold. You can do it yourself or hire a solicitor or specialised conveyancer to perform the tasks for you. The buying of a freehold is much less complicated than the buying of a leasehold.
Discounted Rate – This is where the lender makes a guaranteed reduction off the standard variable rate for an agreed period of time. After the discounted period ends, the mortgage usually moves to the lenders’ standard variable rate. Watch out for redemption penalties that overhang the initial discount period.
Early Redemption Charges – Redemption is when the borrower pays off the capital and the interest on the mortgage and thus owns the property outright. Early redemption fees are the charges incurred for paying off the mortgage early, either to buy the house outright, move or re-mortgage. Always ask about early redemption charges before you agree a mortgage.
Endowment – Endowments are life assurance policies with an investment element designed to pay off the outstanding capital on an interest-only mortgage. There are a few types of endowments, such as ‘with profits’, ‘unitised with profits’ and ‘unit-linked’. In the 1980s, these were sold by salesman who seemly suggested that these policies were “guaranteed” to pay off the mortgage at the end of the term. However, the investment returns on these policies have fallen to below what was previously considered to be the norm. Consequently, many policies are not worth what was originally forecast and may not fully repay the money borrowed at the end of the mortgages’ term.
Equity – In housing terminology, equity is the difference between the value of the property and the money owed on the property. So if the property is valued at £200,000 and you owe £150,000 on the mortgage, you have equity of £50,000. If you sold at that moment, you would receive £50,000. Should the value of the home be less than the mortgage outstanding then you have negative equity.
Freehold – Owning the freehold means that you own the total rights to the property and the land on which it is built.
HLC – This is the Higher Lending Charge (it was previously known as a Mortgage Indemnity Guarantee). It is levied by around three quarters of all lenders on clients who cannot afford to put down a deposit of 10% of the price of the property. In practice it is a type of insurance aimed at protecting the lender should you default on your mortgage when the value of your home is less than the capital you borrowed. The insurance only provides cover for the lender, not you, and typically costs £1,500.
Homebuyers Report – A property survey aimed at providing more information than a mortgage valuation but less information than a full structural survey. It will help the borrower to decide whether to purchase and help the lender to decide how much to lend.
Interest Only Mortgage – This is a mortgage where your monthly repayments only pay the interest on the mortgage. Therefore, at the end of the mortgage you still have to repay the full sum you borrowed. You are advised to have a separate investment vehicle into which you make payments aimed at building up a fund capable of paying off the mortgage capital at the end of the term. Typical investments include ISA’s, a pension or an endowment policy.
IFAs – Stands for Independent Financial Advisor. These advisors are regulated by the Financial Services Authority. To be classified as “independent” they have to be able to offer you the full range of products from all financial product providers. They are not entitled to describe themselves as “independent” if they can only offer products from a restricted panel of financial companies. A Financial Advisor can be one man band or work for very large companies. Before they make any recommendation, an IFA must carry out a detailed fact find so they fully understand your financial circumstances. They can then make their recommendations to suit your personal circumstances.
ISA – An ISA is an Individual Savings Account, which is a tax-free method of owning shares, building up a cash savings account or a life assurance policy. You can use an ISA to build up a capital sum to repay an interest only mortgage.
Leasehold – If your property is leasehold, ownership of the property reverts to the Freeholder at a set date. Many houses were originally sold on 999 year leases which means that 999 years after the initial date of the Leasehold, ownership of the property reverts to the Freeholder. Building in multiple occupation such as apartments, are always sold on a leasehold and usually have a much shorter leasehold period – 100 and 125 years is quite common. Often, with a block of apartments, the apartment owners individually own the leaseholds whilst a management company, in which they hold shares, owns the freehold. These days, however, leaseholders who live in the property have the legal right to buy their freehold under terms laid down by UK law.
Life Insurance – This can also be called Term Insurance or, when specifically linked to proprty purchase, as Mortgage Protection Insurance. It is designed to pay a tax free lump sum in the event of your death to enable your mortgage to be repaid in full. There are a number of variants such as Level Term Life Insurance and Decreasing Term Life Insurance. At the outset you take out insurance for the full sum you have borrowed from your mortgage lender and for the same number of years as you have agreed on your mortgage. These insurance policies do not have any investment or surrender value. The premiums are based on a number of factors – the main ones being the amount of cover you need, your age, health and how many years you want to be insured for.
Lock-In Period – This is the minimum period you have agreed to stay with the lender. Depending on the deal, it could be as low as six months up to the whole of the term. Should you wish to repay the mortgage or remortgage during the lock-in period, you will invariably have to pay redemption penalties. Always make sure you know how long you are locked in for with your mortgage.
LTV – Literally means Loan to Value. This is a measurement of the mortgage amount against the value of the property or the price that you are actually paying. A £157,500 mortgage on a property for which you paid £175,000 would be a LTV of 90%. Lenders tend to charge a Mortgage Indemnity Premium on mortgages with a loan to value of anything about 75%. Some don’t so ask about this.
MIG – This has now changed its name to HLC. See above.
Mortgage – A mortgage is a long-term loan taken out in order to buy a property with repayment secured on that property. So if you don’t keep to the repayment terms, the lender can repossess the property, sell it and retain the money they are owed. Any balance is then paid to you. If the property is sold for less than you owe your lender, you still remain liable to repay the shortfall.
Mortgage Advisor – On October 31st 2004 the selling of mortgages in the UK came under the remit of the City watchdog, The Financial Services Authority (FSA). As from that date any person providing mortgage advice had to be registered with the FSA and abide by its rules of conduct, methods of operating and training programmes etc. The objective has been to improve life for the consumer by offering better protection, clear information and access to redress for poor advice.
Negative Equity – Negative equity is when the value of your home is less than the amount that you owe on your mortgage plus any other loans secured against it. It can happen very easily if you take out a 100% mortgage or if property prices fall. (Also see Higher Lending Charge)
Portable – This is a measure of how easy it is to move a mortgage from one property to another should a property move be required. This is vital if you are moving during your lock-in-period and wish to avoid redemption penalties.
Repayment Mortgage – This is the same as a Capital and Interest mortgage – see above.
Searches – During the conveyancing process, the buyer has to be sure that the seller has title to the property and identify any matters may affect the prospective owners ownership of the property. For example, whether the property is affected by any proposed road building, whether there are preservation orders affecting the property, is it a listed building and has it been built in accordance with planning conditions and building regulations. Searches will also show whether there are mines under or close by the property. This information is obtained by the person undertaking the conveyancing from HM Land Registry and the relevant Local Authority. These investigations are collectively known as “Searches”.
Self-Certification – Should you have difficulty in providing documentation that “proves” your income to a prospective mortgage lender, you may need a self-certification mortgage. In essence you personally certify what your full income is. If you receive high bonuses, or work seasonally or on commission, or are self-employed this may be your best option. You declare your income plus some evidence that your declaration is reasonable. Ideally lenders want to see as much guaranteed income as possible. To compensate the lender for the increased risk they are taking on a self-certified mortgage, they will charge you a higher rate interest, typically 1% over their standard variable rate.
Stamp Duty Land Tax (commonly known simply as Stamp Duty) – You pay Stamp Duty Land Tax on property like houses, flats, other buildings and land. If the purchase price is £120,000 or less, you don’t pay any Stamp Duty Land Tax. If the price is more than £120,000, you pay between one and four per cent of the whole purchase price, on a sliding scale.
Upto £120,000 – No duty payable
£120,001 to £250,000 – 1% duty payable*
£250,001 to £500,000 – 3% duty payable
£500,001 and over – 4% duty payable
*If you’re buying a property an area designated by the government as ‘disadvantaged’, you don’t pay any Stamp Duty Land Tax if the purchase price is £150,000 or less.
Did you know? Stamp Duty was originally introduced by William of Orange when he was King of England.
Structural Survey – The most thorough report you can get on the condition of the property you are considering to buy. The surveyor will look in detail at the inside and outside of the property and will tell you if the property is structurally sound. All major and minor defects in the building will also be listed and should tell you what maintenance work may be needed either now or in the future. You should make sure the scope of the survey is agreed in writing before you commission it. Should the survey identify problems, use them to negotiate a reduction in the price before you exchange contracts.
Variable Rate – This is when the interest rate you pay on your mortgage can go up or down depending on changes to the lender’s standard variable rate. If you have a variable rate mortgage your monthly mortgage payments will change whenever the lender changes the interest rate.
Valuation – This is where a valuer appointed by your proposed lender, visits the property in order to estimate its current value. This value is then used by the lender as a basis for its security and to calculate its Loan to Value Ratio. The borrower never sees the valuation. With some mortgage deals the lender absorbs the cost of the valuation but in many cases the borrower has to pay upfront.
Michael Challiner has 15 years experience in financial services marketing at senior level. Michael now works as the editor of www.kings-college-brokers.co.uk
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Accretion – The gradual and natural growth of land resulting from forces of nature, as in sediment deposition by a river or stream.
Acre – A common unit of land measure equal to 43,560 square feet or 4046.87261 square meters or 0.404687261 hectare
40 Acres – Is equal to 1,742,400 square feet or to a square parcel that measures a quarter-mile on each side.
Agricultural Zoning – Zoning policies intended to protect farmland and farming activities from incompatible nonfarm uses, such as residential and commercial development. Agricultural zoning, aslo referred to as agricultural protection zoning, can specify many factors, such as preferred land use, minimum size of farm or the number of nonfarm or residential dwellings allowed. Agricultural zoning is usually based on historic land use, soil properties, and location and allows activities such as orchards, farms, ranching, or timber production.
Amortization – This is a schedule that outlines your loan payments for the duration of the home buying loan. It details how much of each monthly payment goes toward the principal and how much goes toward the loan. Initially, the bulk of your payments will be applied toward the interest.
Appraisal – Generally paid for by the home buyer, the appraisal provides an estimate of the property’s worth. Required by most lenders, it must be performed by a licensed appraiser before your home loan will be approved. An appraisal may take the form of a lengthy report including detailed methods, a short completed form, a simple letter, or even an oral report.
As Is – “As is” describes property offered for sale in its present state or condition, with no warranties or promises made as to its value or suitability for a specific use. Buyers must take care to practice due diligence when purchasing property offered “as is”.
Bare Land – Unimproved land; land in its unused natural state prior to development or construction of improvements such as streets, lighting, sewers, and the like.
Buyer’s Agent – A buyer’s agent, as opposed to a seller’s agent, represents only the interests of the home buyer. For an agent to be considered a buyer’s agent, an agreement must be made between the buyer and the agent. Without such an agreement, the agent could end up representing the seller in a real estate transaction.
Closing – This is the final step in the home buying process in which the transfer of the deed is made from the buyer to the seller. The mortgage is also finalized at this point.
Closing Costs – These costs are required to be paid at the time of closing. Closing costs are usually between 3% and 5% of the price of the home and include such fees as loan origination fees, attorney fees, and recording fees. As part of your home buying negotiation, you might get the seller to pay some, or all, of the closing costs.
Deed – A legal document which conveys title (ownership) to real property.
Easement – Right held by one property owner to make use of the land of another for a limited purpose, as right of passage.
Earnest Money – Along with an offer, buyers can make a deposit on the home to demonstrate the seriousness of the offer. When an earnest money deposit is made, it is held by an escrow until closing. It is then added to the down payment.
Escrow – Funds held before closing by a third party, usually including the earnest money deposit. Future taxes and homeowners insurance, held by the mortgage company after closing, are also considered escrow.
FSBO, For Sale By Owner – This term refers to property that is being sold without a real estate agent. FSBO is also used to refer to the home owner who is selling the property.
Foreclosure – The process after home buying is complete by which a lender repossesses and resells a property after the owner has defaulted.
General Warranty Deed – The most common deed is called a “General Warranty” deed. Such a deed contains “warranties” or guarantees from the grantor (commonly the “Seller”) to the grantee (commonly the “Buyer”) that the Seller is the owner of the property and that no one else has any interest in the property, other than those exceptions stated in the deed.
Grantee – Someone to whom the title of property is transferred (buyer).
Grantor – A person who makes a grant in legal form; “conveyed from grantor to grantee” (seller).
Land Locked – Referring to a parcel of real property which has no access or egress (entry or exit) to a public street and cannot be reached except by crossing another’s property.
Legal Description – A legal description is used to describe the location of your land in legal documents (for example, the deed to your land). The Public Land Survey System (PLSS) is used in legal descriptions. It employs a grid system based on township, range and section numbers.
Lien – This is a legal claim that keeps the property from being sold until the lien is paid off.
Loan Origination Fee – This is the fee charged by the lender for processing the loan. The loan origination fee is due at closing.
Maintenance – condition to perform the services for which it was designed.
Market Value – The highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Master Plan – A comprehensive plan to guide the long-term physical development of a particular area.
Modification – Occasionally, a lender will agree to modify the terms of your mortgage without requiring you t refinance. If any changes are made, it is called a modification.
Mortgage – A legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some states use First Trust Deeds.
Mortgagee – The lender in a mortgage agreement.
Mortgage Insurance – Insurance that covers the lender against some of the losses incurred as a result of a default on a home loan. Often mistakenly referred to as PMI, which is actually the name of one of the larger mortgage insurers. Mortgage insurance is usually required in one form or another on all loans that have a loan-to-value higher than eighty percent. Mortgages above 80% LTV that call themselves “No MI” are usually a made at a higher interest rate. Instead of the borrower paying the mortgage insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance themselves. Also, FHA loans and certain first-time homebuyer programs require mortgage insurance regardless of the loan-to-value
Mortgage Insurance Premium (MIP) – The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.
Mortgage Life and Disability Insurance – A type of term life insurance often bought by borrowers. The amount of coverage decreases as the principal balance declines. Some policies also cover the borrower in the event of disability. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds. In the case of disability insurance, the insurance will make the mortgage payment for a specified amount of time during the disability.
Mortgagor – The borrower in a mortgage agreement
Mortgage Broker – A mortgage company that originates loans, then places those loans with a variety of other lending institutions with whom they usually have pre-established relationships
Multidwelling Units – Properties that provide separate housing units for more than one family, although they secure only a single mortgage.
Multi-Property Auction – A group of properties offered through a common promotional campaign. The properties to be auctioned may be owned by one seller or multiple sellers.
Negative Cash Flow – The investment situation where cash expenditures to maintain an investment (taxes, mortgage payments, maintenance, etc.) exceed the cash income received from the investment.
Negotiable Instrument – Any written instrument which may be transferred by endorsement or delivery so as to vest legal title in the transferee.
Negotiation – The transaction of business aimed at reaching a meeting of minds among the parties; bargaining.
Net Income – The sum arrived at after deducting from gross income the expenses of a business or investment, including taxes and insurance, and allowances for vacancy and bad debts; what the property will earn in a given year’s operation.
Net Lease – A lease, usually commercial, whereby the lessee pays not only the rent for occupancy, but also pays maintenance and operating expenses such as tax, insurance, utilities and repairs. Thus the rent paid is “net” to the lessor.
Net Worth – The value remaining after deducting liabilities from assets.
Nominal Consideration – A consideration bearing no relation to the real value of the contract. A deed often recites a nominal consideration, such as “ten dollars and other valuable consideration.”
Non-Competition Clause – A provision in a contract or lease prohibiting a person from operating or controlling a nearby business which would compete with one of the parties to the contract.
Non-Conforming Clause – A permitted use which was lawfully established and maintained but which no longer conforms to the current use regulations because of a change in the zoning.
Non-Disturbance Clause – A clause inserted in a mortgage whereby the mortgagee agrees not to terminate the tenancies of lessees who pay their rent if the mortgagee forecloses on the mortgagor-lessor’s building.
Normal Wear and Tear – That physical deterioration which occurs in the normal course of the use for which a property is intended, without negligence, carelessness, accident or abuse of the premises (or equipment or chattels) by the occupant, members of household, or their invitees or guests.
Note – A document signed by the borrower of a loan, stating the loan amount, the interest rate, the time and method of repayment and the obligation to repay. The note is the evidence of the debt. When secured by a mortgage, it is called a mortgage note.
Notice – (1) Legal notice is notice which is required to be made by law, or notice which is imparted by operation of law as a result of the possession of property or the recording of documents. (2) Notice which is required by contract, for example, when the parties agree to terminate a contract by the written notice of either party 30 days prior to termination.
Notice of Completion – Document filed to give public notice that a construction job has been completed and that mechanics’ liens must be filed within certain period of time
Notice of Default – A notice to a defaulting party that there has been a default, usually providing a grace period in which to cure the default.
Notice of Responsibility – A legal notice designed to relieve a property owner from responsibility for the cost of improvements ordered by another person.
Notice to Quit – A written notice given by a landlord to his tenant, stating that the landlord intends to regain possession of the leased premises and that the tenant is required to quit and remove himself from the premises either at the end of the lease term or immediately if there is a breach of lease or if the tenancy is at will or by sufferance; sometimes refers to the notice given by the tenant to the landlord that he intends to give up possession on a stated day.
Novation – The substitution of a new obligation for an old one; substitution of new parties to an existing obligation, as where the parties to an agreement accept a new debtor in place of an old one.
Nuisanse – Conduct or activity which results in an actual physical interference with another person’s reasonable use or enjoyment of his property for any lawful purpose.
Private Mortgage Insurance – When you make a down payment less than 20 percent of the loan amount, the home buying lender requires you to pay private mortgage insurance. This insurance protects the lender if you default on the loan.
Quit Claim Deed – Conveys to a Buyer only what the Seller actually owns, if anything, and provides no guarantee from the Seller to the Buyer that the Seller has any interest in the property to convey. The rule to follow for a person accepting a quit claim deed is “Buyer beware”. If it later turns out that the Seller’s rights to use the property are encumbered by another person’s interest in the property, the Buyer is out of luck, and has no recourse against the Seller.
Row Land – Unimproved land; land in its unused natural state prior to development or construction of improvements such as streets, lighting, sewers, and the like.
Title Insurance – This insurance protects your title from claims against it.
Vacancy Rate – The current percentage of vacant properties in a given area, regardless of why they are vacant.
VA Mortgage – A mortgage that is guaranteed by the Department of Veterans Affairs (VA).
Variance – An exception to municipal zoning regulations granted for a specific time period to allow for non-conforming use of the land.
Vent Pipe – A pipe allowing gas to escape.
Vested – Having the right to use a portion of a fund such as an IRA. Typically vesting occurs over time. If you are 100% vested, you have a right to 100% of the fund.
Veterans Affairs, Department of VA – The successor to the Veteran’s Administration, this government agency is responsible for ensuring the rights and welfare of our nation’s veterans and their dependents. Among other duties, the VA insures home loans made to veterans and provides healthcare to current and former servicemen
Voltage – An expression of electric force, or pressure. One volt being the force needed to move one amp against one ohm resistance.
Walk-Through Inspection – A process whereby an appraiser examines a property in preparation for estimating its value. Also, the process of inspecting a property for any damage prior to that property being bought or sold.
Warranty – An affidavit given to stipulate the condition of a property. The person giving the warranty assumes liability if the condition turns out to be untrue.
Watt – An expression of amount of electrical power. Volt times amps equals watts.
Wear and Tear – A term used to indicate the normal damage inflicted on a property through every-day use.
Weather Stripping – Material used around windows and doors to prevent drafts.
Weep Hole – Drainage hole that allows water to escape.
Zero Lot Line – A municipal zoning category wherein a building or other fixture may abut the property line.
Zone – A specific area within a municipality or other jurisdiction which conforms to certain guidelines regarding the use of property in the zone. Typical zones include single-family, multi-family, industrial, commercial and mixed-use.
Social Media Terms
Social networking website with more than 500 million of active users.
Social networking website targeted at general audince.
Instant messaging computer program.
World’s largest professional network with over 75 milion members and growing rapidly.
Social networking website where you can create a profile page that you can use to meet new friends.
Online address book and social networking service.
Website which offers a social networking and microblogging service, enabling its users to send and read other users messages called tweets.
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