Acceleration Clause: This provision gives the lender the right to demand payment of the entire outstanding balance if you miss a monthly payment, sell the property, or otherwise fail to perform as promised under the terms of your mortgage! Watch out for an acceleration clause in your mortgage contract.

Adjustable-Rate Mortgage (ARM): An adjustable-rate mortgage is a mortgage whose interest rate and monthly payments vary throughout its life. Arms typically start with an unusually low interest rate (see teaser rate) that gradually rises over time. If the overall level of interest rates drops, as measured by a variety of different indexes (see index), the interest rate of your ARM generally follows suit. Similarly, if interest rates rise, so does your mortgage’s interest rate and monthly payment? Caps (see also periodic caps and lifetime caps) limit the amount that the interest can fluctuate. Before you agree to an adjustable-rate mortgage, be sure that you can afford the highest payments that would result if the interest rate on your mortgage increased to the maximum allowed.

Annual Percentage Rate (APR): This figure states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points, and any other add-on loan fees and costs. The APR is thus invariable higher than the rate of interest that the lender quotes for the mortgage.

Appraisal: You must pay for the mortgage lender to hire an appraiser to give an "opinion of value" (that is the appraiser gives a measure of the market value) of the house you want to buy: This professional opinion helps to protect the lender from lending you money on a home that is worth less than what you’ve agreed to pay for it. For typical homes, the appraisal fee is in the $200 to $300 range.

Appreciation/Depreciation: Appreciation refers to the increase of a property’s value. Depreciation (the reverse of appreciation) is when a property’s value decreases.

Arbitration of Disputes: A method of solving contract disputes which is generally less costly and faster than going to a court of law. In arbitration, buyers and sellers present their differences to a neutral arbitrator who, after hearing the evidence, makes a decision that resolves the disagreement. The arbitrator’s decision is final and may be enforced as if it were a court judgment. Consult a real estate lawyer if you are ever a party in arbitration.

Assessed Value: The assessed value is the value of a property (according to your local county tax assessor) for the purpose of determining your property taxes.

Assumable Mortgage: Some mortgages allow future buyers of your home to take over the remaining loan balance of your mortgage. If you need to sell your house but interest rates are high, having an assumable mortgage may be handy. You may be able to offer the buyer your assumable loan at a lower interest rate that the current going interest rate. Most assumable are adjustable-rate mortgages – fixed-rate, assumable mortgages are nearly extinct these days because lenders realize that they lose a great deal of money on these types of mortgages when interest rates skyrocket.

Balloon Loan: Balloon loans require level payments just as a 15-30 year fixed-rate mortgage does.  But well before their maturity date (the date when they’d be paid off)—typically three to ten years after the start date – the full remaining balance of the loan becomes due and payable.  Although balloon loans can save you money because they charge a lower rate of interest relative to fixed-rate loans, balloon loans are dangerous.  Being able to refinance a loan is never a sure thing.  Beware of balloon loans!

Broker: Real estate brokers are one level higher on the real estate professional totem pole than real estate agents (or salespeople). Real estate agents cannot legally work on their own – a broker must supervise them. To become a broker in most states, a real estate salesperson must have number of years of full-time real estate experience, meet special educational requirements, and pass a state-licensing exam.

Buyer’s Broker: Historically, real estate brokers and agents worked only for sellers. The buyer’s broker only owes allegiance to the buyer and does not have an agent relationship with the seller. Although this may be viewed as an improvement for all the buyers in the world, don’t be too ecstatic. Buyer’s brokers are still paid on commission when you buy, so don’t expect them to be supportive of you if you habitually lollygag. Also keep in mind that the higher the purchase price of the house, the more money the buyer’s broker makes.

Caps: Real estate caps have nothing to do with dental work. There are two different types of caps for adjustable – rate mortgages. The life cap limits the highest or lowest interest rate that is allowed over the entire life of your mortgage. The periodic cap limits the amount that your interest rate can change in one adjustment period. A one-year ARM, for example, may have start rate of 7.5 percent with a + or – 2 percent periodic adjustment cap and a 6 percent life cap. On a worst – case basis, the loan’s interest rate would be 9.5 percent in the second year, 11.5 percent in the third year, and 13.5 percent (7.5 percent start rate plus the 6 percent life cap) forevermore, starting with the fourth year.

Cash Reserve: Most mortgage lenders require that homebuyers have sufficient cash left over after closing on their home purchase in order to make the first two mortgage payments or to cover financial emergency.

Closing Costs: After you’ve passed every home-buying obstacle and reached the safe clearing in order to buy your home, one final potential land mine appears in the form of closing costs. These costs generally total from 2 percent to 5 percent of the home’s purchase price and are completely independent of (and in addition to) the down payment. Closing costs include such things as points (that is, loan origination fee to cover lender’s administrative costs), an appraisal fee, a credit report fee, mortgage interest for the period between the closing date and the first mortgage payment, homeowners insurance premium, title insurance, pro-rated property taxes, and recording and transferring charges. So when you are finally ready to buy, you need to have enough cash to pay all these costs in order to buy your dream home.

Community Property: Along with joint tenancy and tenancy-in-common, community property is a way that married couples may take title to real property. Community property offers two major advantages over joint tenancy and tenancy-in-common. First, community property ownership allows spouses to transfer interest, by Will or otherwise, to whomever they wish. The second advantage of holding title to a home in community property is that the surviving spouse gets favorable tax treatment. The market value of the entire house as of the spouse’s date death (such market value is also called the house’s "stepped-up basis") is used rather than the house’s original cost, which reduces the taxable profit (assuming that the home has appreciated in value) when the houses is sold.

Contingencies: Contingencies are conditions contained in almost all-home purchase offers. The seller or buyer must meet or waive all contingencies before the deal can be closed. These conditions are related to such things as the buyer’s review and approval of property inspections or the buyer’s ability to get the mortgage financing that is specified in the contract.

Covenants, Conditions, & Restrictions (CC&R’s): CC&R’s establish a condominium by creating a homeowners association, by stipulating how the condominium’s maintenance and repairs will be handled, and by regulating what can and can’t be done to individual units and the condominium’s common areas. These restrictions may apply to lawn maintenance, window curtain colors, and the like. Some CC&R’s put community decision-making rights into the hands of a homeowners association.

Debt-To-Income Ratio: Before you go out home buying, you should determine what your price range is. Lenders generally figure that you should not spend more than about 33 to 40 percent of your monthly income for your housing costs. The debt-to-income ratio measures your future monthly housing expenses, which include your proposed mortgage payment (debit), property tax, and insurance, in relation to your monthly income.

Deed: A deed is the document that conveys title to real property. Before you receive the deed, the title insurance company must receive the Mortgage Company’s payment and your payments for the down payment and closing costs. The title insurance company must also show that the seller holds clear and legal title to the property for which title is being conveyed.

Down Payment: The down payment is the part of the purchase price that the buyer pays in cash, up front, and does not finance with a mortgage. Generally, the larger the down payment, the better the deal that you can get on a mortgage. You can usually get access to the best mortgage programs with a down payment of 20 percent of the purchase price of the home.

Equity: In the real estate world, equity refers to the difference between the market value of your home and what your owe on it. For example, if your home is worth $200,00 and you have an outstanding mortgage of $140,000, your equity is $60,000.

Fixed-Rate Mortgage: The fixed-rate mortgage is the granddaddy of all mortgages. You lock into an interest rate (for example, 8.5 percent), and it never changes during the life (term) of your 15 or 30 year mortgage. Your mortgage payment will be the same amount each and every month. Compare fixed-rate mortgages with adjustable-rate mortgages.

Foreclosure: Foreclosure is the legal process of the mortgage lender taking possession of and selling the property to attempt to satisfy indebtedness. When you default on a loan and the lender deems that you are incapable of making payments, you may lose your house to foreclosure. Being in default, however, does not necessarily lead to foreclosure. Some lenders are lenient and help you work out a solution if they see that your problems are temporary. Foreclosure is traumatic for the homeowner and expensive for the lender.

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 your 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 disaster. As with other types of insurance, get the highest deductibles with which you are comfortable.

Home 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.

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, 11^th 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 are 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.

Joint Tenancy: 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 transfer his deed from joint tenancy to tenancy-in-common.

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 confine and define how much money the injured party may recover.

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 have 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.

Margin: The margin is the amount that is added to the index in order to calculate your interest rate for an adjustable-rate mortgage. Most loans have margins around 2.5 percent. Unlike the index (which constantly moves up and down), the margin never changes over the life of the loan.

Mediation of Disputes: Mediation is usually a fast, inexpensive way to resolve simple contract disputes. In Mediation, buyers and sellers present their differences to a neutral mediator who does not have the power to impose a settlement on either party. Instead, the mediator helps buyers and sellers work together to reach a mutually acceptable solution of their differences. It is probably in your best interests to mediate your problem before going to an arbitrator or suing in a court of law. (Also see arbitration.)

Mortgage Broker: A mortgage broker is a person who can help you find a mortgage. Mortgage brokers buy mortgages wholesale from lenders and then mark the mortgages up (typically from 0.5 to 1 percent) and sell them to buyers. A good mortgage broker is most helpful for people who will not shop around on their own for a mortgage or for people who have blemishes on their credit report.

Multiple Listing Service: A multiple listing service (or MLS) is a real estate agents’ cooperative service that contains descriptions of most of the houses that are for sale. Real estate agents use this computer-based service to keep up with property they are listing for sale in their area.

Points: Also know as a loan’s "origination fee," points are interest charges paid up-front when you close on your loan. Points are actually percentage of your total loan amount (one point is equal to 1 percent of the loan amount.) For a $100,000 loan, one point costs you $1,000. Generally speaking, the more points that a loan has, the lower its interest rate should be. All the points that you pay on a purchase mortgage are deductible in the year that you pay them. If you refinance your mortgage, however, the points that your pay at the time that refinance must be amortized over the life of the loan. If you get a 30-year mortgage when you refinance, for example you can deduct only one-thirtieth of the points on your taxes each year.

Prepayment Penalty: One advantage of most mortgages is that you can make additional payments to pay the loan off faster if you have the inclination and the money to do so.  A prepayment penalty discourages you from doing this by penalizing you for early payments. Some states prohibit lenders from penalizing people who prepay their loans. Avoid mortgages, which penalize prepayment!

Private Mortgage Insurance (PMI): Also know as "mortgage default insurance"). The smaller the down payment, the more likely a homebuyer is to default on a loan. Private mortgage insurance can add hundreds of dollars per year to your loan costs. After the equity in your property increases to 20 percent, you no longer need the insurance.

Property Tax: You will have to pay a property tax on the home you own. Annually, property tax averages 1 to 2 percent of a home’s value, but property tax rates vary widely throughout this great land.

Principal: The principal is the amount that you borrower for a loan (example: If you borrow $100,000, your principal is $100,000).  Each monthly mortgage payment consists of a portion of principal that must be repaid plus the interest that the lender is charging you for the use of the money.  During the early years of your mortgage, your loan payment is primarily interest.

Private Mortgage Insurance (PMI): If your down payment is less than 20 percent of your home’s purchase price, you will likely need to purchase private mortgage insurance.

Pro-rations: Certain items such as property taxes and homeowners association dues are continuing expenses that must be prorated (distributed) between the buyers and sellers at close of escrow. If the buyers, for example, owe the sellers money for property usually has 72 hours (though the allotted amount of time can vary) from the seller’s notification to remove the contingency-of-sale clause and move on with the purchase; otherwise, the buyer’s offer is wiped out.

Teaser Rate: Otherwise known as the initial interest rate, the teaser rate is the attractively low interest rate that most adjustable-rate mortgage starts with. Don’t be suck into a mortgage because it has a low teaser rate. Look at the mortgage’s formula (index + margin = interest rate) for a more reliable method of estimating the loan’s future interest rate – the interest rate that will apply after the loan is "fully indexed."

Tenancy-In-Common: Tenancy-in-common is probable the best way for unmarried co-owners to take title to a home (except for those unmarried co-owners who are involved in close, long-term relationships – see joint tenancy). Co-owners do not need to own equal shares of the property that is held as a tenancy-in-common. A tenancy-in-common also does not provide for the right of survivorship that automatically passes to deceased partner’s ownership to the survivor without probate. The deceased’s share of the property involved in a tenancy-in-common passes to the person named to receive that share of the property in the deceased’s will or living trust.

Title Insurance: Title insurance covers the legal fees and expenses necessary to defend your title against claims that may be made against your ownership of the property. The extent of your coverage depends upon whether you have an owner’s standard coverage or extended-coverage title insurance policy. To get a mortgage, you also have to buy a lender’s policy to protect your lender against title risks.

I would like to acknowledge the following references in the preparation of the above Real Estate Terms and Definitions: