Real Estate Finance Terminologies

Real Estate Finance Terminologies

Acceleration Clause – provision that gives lender the right to demand payment of entire principal balance in
case of default.

Adjustable-Rate Mortgage (ARM) – A mortgage allowing lender to adjust interest rate periodically based
on an index.

Amortization Schedule – schedule of the amounts of amortization, portions applied to interest and principal
and balance.

Amortization Term – time required to amortize mortgage loan, expressed as a number of months.

Annual Percentage Rate (APR) – cost of a mortgage stated as a yearly rate; includes interest, insurance, and
loan fees.

Annuity – an amount paid yearly or at other regular intervals.

Assumable Mortgage – A mortgage that can be taken over (“assumed”) by the buyer when a home is sold.

Assumption – transfer of the seller’s existing mortgage to the buyer.

Automatic Redemption Clause – stipulation in a blanket mortgage that when a buyer pays in full the
purchase price for his portion, the mortgagee shall correspondingly release said portion from the mortgage.

Biweekly Payment Mortgages – A mortgage which allows biweekly payments, thus resulting in 26 or 27
payments in a year and accelerating payment of the loan and substantial savings in interest.

Blanket Mortgage – the mortgage that is secured by a several properties in a project.

Buydown Mortgage – a mortgage in which an initial lump sum payment is made to reduce the monthly
payments during the first few years of a mortgage.

Buyers Equity – The difference between the contract price and the loanable amount.

Cap – A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage
payments may increase or decrease. Caps can be on payment amount, rate, periods.

Capacity – The borrowers ability to repay a loan.

Cash-out Refinance – A refinance transaction where the amount received from a new loan exceeds the
amount needed to repay the previous loan; the borrower receives additional cash that can be used for any

Closed Mortgage – a mortgage which cannot be paid off until its maturity unless the creditor consents to
earlier payment.

Collateral – An asset (such as real estate or chattel) that guarantees the repayment of a loan.

Collateral Security – A separate obligation to guarantee its performance of the agreement or delivery of the

Co-maker – A person who signs a promissory note along with the borrower.

Convertible ARM – an adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage.

Cooperative Mortgages – Mortgages related to a cooperative project.

Deed-in-lieu – A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure.
“Dacion en pago.”

Deed of Trust – instead of a mortgage, title is conveyed to a trustee. Borrowers convey title to trustee until
the loan is paid.

Defeasance – An instrument which defeats the force of some other instrument, such as mortgage, etc.

Defeasance Clause – clause that gives mortgagor the right to redeem his property upon payment of his

Deficiency – The difference between the outstanding loan and sales price of collateral in a foreclosure sale.

Deficiency Judgment –A judgment given when the collateral for a loan does not satisfy the debt upon its

Discount Points – Discount points are additional funds charged by lenders to get a lower interest rates on
your mortgage.

Due-on-sale Provision – provision that allows lender to demand repayment in full if borrower sells the

Equity – the difference between the fair market value of the property and the loan value or outstanding loan

Equity of Redemption – The right to redeem property during the foreclosure period.

Escrow – money or documents deposited with a third party to be delivered upon the fulfillment of a

Escrow Analysis – periodic examination of escrow accounts to determine sufficiency for costs covered by

Escrow Collections – funds collected by the servicer for escrow to cover borrower’s property expenses.

Escrow Disbursements – use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance,

Escrow Payment – portion of amortization to be held for paying taxes, insurance, lease payments, etc.

First and Second Mortgages – A “first mortgage” is the primary loan. The “second mortgage” is a secondary
loan, subordinate to the first. Borrowers get a second mortgage to tap into their equity.

Fixed-Period Adjustable-Rate Mortgages – Adjustable-rate mortgage (ARM) that maintains same initial
interest rate for the first three, five, seven, or 10 years of your loan, depending on the term you choose.

Fixed-Rate Mortgage (FRM) – A mortgage in which the interest rate does not change during the entire term
of the loan.

Growing-Equity Mortgage – A fixed-rate mortgage that provides scheduled payment increases over an
established period of time, with the increased amount of the monthly payment applied directly toward the
remaining balance of the principal.

Guarantee Mortgage – A mortgage that is guaranteed by a third party.

Home Equity Conversion Mortgage – A special type of mortgage that enables older home owners to
convert the equity they have in their homes into cash, using a variety of payment options. Sometimes called a
reverse mortgage.

Home Equity Line of Credit – A mortgage loan, which is usually in a subordinate position, that allows the
borrower to obtain multiple advances of the loan proceeds at his or her own discretion, up to a maximum
amount of equity.

Housing Expense Ratio – The percentage of gross monthly income that goes toward paying housing

Internal Rate of Return – the rate of return which considers the present value of all future cash flows

Lease-purchase Mortgage Loan – A loan in which monthly payments already includes loan servicing and
an extra amount saved towards a down payment. Lessee will have the option to buy the property after a
designated period of time.

Leverage – Making an investment with only partial amount of the total amount of the investment. Also called
“On Margin”.

Lifetime Payment Cap – For an adjustable-rate mortgage, a limit on the amount that payments can increase
or decrease.

Lifetime Rate Cap – For an adjustable-rate mortgage, a limit on the amount that the interest rate can increase
or decrease.

Line of Credit – An agreement between the borrower and the bank to extend credit up to a certain amount for
a certain time.

Loan Application – a detailed form designed to provide information from borrower.

Loan Commitment – letter giving loan amount, interest rate, payment period, origination fees, monthly
charges, etc.

Loan Origination – administrative process of reviewing a loan application and securing a loan.

Loan Origination Fee – amount to cover the administrative costs of processing the loan. Often expressed in

Loan-To-Value (LTV) ratio – loan amount (or balance) versus appraised market value (or selling price), in

Lock-in – the lender guarantees a specified interest rate if a mortgage goes to closing within a set period of

Lock-in Period – The time period during which the lender has guaranteed an interest rate to a borrower.

Margin – for adjustable-rate mortgage (ARM), the amount above the index rate; subject to interest rate caps.

Money Market Account – A savings account that provides bank depositors with many of the advantages of a
money market fund. Certain regulatory restrictions apply to the withdrawal of funds from a money market

Money Market Fund – A mutual fund that allows individuals to participate in managed investments in shortterm
debt securities, such as certificates of deposit and Treasury bills.

Moratorium – The temporary suspension on the enforcement of liability for debts.

Mortgage – An instrument by which property is pledged to secure the payment of a debt or obligation;

Mortgage Banker – A company that originates mortgages exclusively for resale in the secondary mortgage

Mortgage Banking Companies -make loans to consumers and may sell these loans to other lenders and

Mortgage Broker – individual or company that brings borrowers and lenders together for the purpose of a
mortgage loan.

Mortgage Insurance – insures the lender against loss caused by a mortgagor’s default on a mortgage.

Mortgage Life Insurance – term life insurance to cover outstanding loan balance in case of debt of the

Mortgagor / Mortgagee – Mortgagor is the borrower – the one who pledges property as collateral. Mortagee
is the lender.

Negative Amortization – gradual increase in mortgage debt that occurs when the monthly payment is not
large enough to cover the entire principal and interest due. The shortfall is added to the remaining balance to
create “negative” amortization.

No Cash-Out Refinance – a new loan to cover the existing balance of the existing loan and all other
associated expenses which will not require any additional equity payment from the borrower.

Open Mortgage – A mortgage which can be paid off any time even before its maturity.

Open End Mortgage – A mortgage containing a clause which permits a mortgagor to borrow additional
money after the loan was reduced, without re-writing the mortgage.

Origination Fee – A fee paid to a lender or a loan service provider for processing a loan application.

Periodic Payment Cap- For an ARM, a limit on the amount that payments can increase or decrease.

Periodic Rate Cap – For an ARM, a limit on the amount that the interest rate can increase or decrease.

PITI – Principle, Interests, Taxes and Insurance are the four components of a monthly mortgage payment.

PITI Reserves – A cash amount that a borrower must have on hand after making a down payment and paying
all closing costs for the purchase of a home. The PITI reserves must equal the amount that the borrower
would have to pay for PITI for a predefined number of months.

Point – A one-time charge by lenders for originating a loan. A point is 1 percent of the amount of the

Pre-foreclosure Sale – A procedure in which the investor allows a mortgagor to avoid foreclosure by selling
the property for less than the amount that is owed to the investor. “Dacion-en-pago”

Prepayment – Any amount paid to reduce or pay in full the balance of a loan before the due date.

Prepayment Penalty – A fee that may be charged to a borrower who pays off a loan before it is due.

Prime Rate – The interest rate that banks charge to their preferred customers.

Principal – The amount borrowed or remaining unpaid.

Qualifying Guidelines – The main elements lenders consider when determining is a borrowers qualifies for a

Qualifying Ratios – Figures showing a borrower’s capacity. Includes: a housing expense as a percent of
income ratio and total debt obligations as a percent of income ratio.

Redemption – Buying back one’s property after a judicial sale.

Rehabilitation Escrow Account – An account set up for funds borrowed to finance your home

Rehabilitation Mortgage – A mortgage created to cover the costs of repairing, improving, an existing

Release Clause – a stipulation that, upon the payment of a specific sum of money to the holder of a trust
deed or mortgage, the lien of the instrument as to a specific described lot or area shall be removed from the
blanker lien on the whole area involved. Also called – “automatic redemption clause.”

Secondary Mortgage Market – The buying and selling of existing mortgages.

Secured Loan – A loan that is backed by collateral.

Servicer – An organization that collects principal and interest payments from borrowers and manages
borrowers’ escrow accounts and services mortgages that have been purchased by an investor in the secondary
mortgage market.

Step-Rate Mortgage – A mortgage that allows for the interest rate to increase according to a specified
schedule (i.e., seven years), resulting in increased payments as well.
Statute of Frauds – A law which provides that certain contracts must be in writing in order to be enforceable
at law. Examples: a real property lease for more than one year; an agent’s authorization to sell real estates.

Trade Equity – Equity that results from a property purchaser giving his or her existing property (or an asset
other than real estate) as trade as all or part of the down payment for the property that is being purchased.

Treasury Index – An index that is used to determine interest rate changes for certain adjustable-rate
mortgage (ARM) plans, based on the rate of Treasury bills issued by governments.

Total Expense Ratio – Total obligations as a percentage of gross monthly income. The total expense ratio
includes monthly housing expenses plus other monthly debts.

Truth-in-Lending – A federal law that requires lenders to fully disclose, in writing, the terms and conditions
of a mortgage, including the annual percentage rate (APR) and other charges.

Wrap-around Mortgage – A mortgage that includes the remaining balance on an existing first mortgage
plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the

wraparound mortgagee, who then forwards the payments on the first mortgage to the first mortgagee.

Yield – the ratio of annual income divided by the amount of investment.

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