Posted on December 7, 2007
Sometimes it's easy, after 16+ years in Real Estate, to forget that first time buyers (and even experienced buyers) can be confused, bewildered, or overwhelmed by the terminology that is used everyday. So I thought it would be useful to share the definitions of some of the more commonly used terms. Now, this can turn into quite a lengthy list, so I plan to cover just a few terms in each post. Please feel free to email me with questions about terms I haven't listed, or if you need further clarification on any of the terms I have listed.
Adjustable-rate mortgage (ARM): This particular type of mortgage has received a lot of press in recent months. It's a mortgage in which the interest rate increases or decreases over the life of the loan based on market conditions, resulting in possible changes of your monthly payment. Some of these loans have rate "caps" that limit the amount your interest rate may change. An ARM, which has many variations, generally has a lower initial rate than a fixed-rate loan because the borrower assumes the risk of the rising or falling market. This is part of the reason it has received so much attention as of late; many homeowners have been unable to afford their new payments, have defaulted on their loans, and have ultimately gone on to foreclosure. If you are considering an ARM, be sure to have a thourough understanding of it's details before making your final committment.
Amortization: The gradual repayment of debt by means of systematic installments of principal and interest (monthly payments) over a set period (term of the loan). At the end of the period, there is a zero balance.
Closing costs: All costs, other than the loan origination fee, paid by the seller or the buyer when the loan is finalized. Examples include lawyers' fees, title search fees, title-insurance premiums, deed recording and transfer tax.
Conventional (fixed-rate) mortgage: A mortgage in which the interest rate and payments remain constant over the life of the loan.
Deed of trust or Mortgage: Establishes the lender's legal status in the property.
Depreciation: Decrease in the value of property over a period of time due to use, wear, tear or obsolescence.
Disclosure statement: There are actually different types of disclosures required by law. In a residential mortgage transaction, the lender or credit arranger is required by the Federal Government's Truth in Lending Act (also known as TILA) to provide the buyer with a good faith estimate of the loan's finance charges within 3 days of receiving the written application. These charges include the total finance charge (the sum of all fees and charges the borrower pays in connection with the loan) and the annual percentage rate (the expression of the total cost of the loan as an annual percentage of the loan amount). These figures enable a borrower to "shop around" by comparing loans with different prospective lenders.
Another type of disclosure is the Property Disclosure Statement, which is required by law in the State of Washington. This is a statement that discloses to prospective buyers the seller's knowledge regarding the property's condition and other material information. It's imperative that the seller complete the form to the best of their knowledge, as inaccuracies can be costly.
That's probably enough information for one day. As I mentioned earlier, I'll continue this list of definitions in future entries. In the mean time, I'm happy to answer your questions, or, if you have a specific term you'd like defined, let me know, and I'll be sure to get that definition to you right away.
Have a great week!
Craig and Debbie