Terms appearing in italic type within the definitions are defined elsewhere in the glossary.

acceleration clause:

In a mortgage contract, this provision gives the lender the right to demand payment of the entire outstanding balance if a homeowner misses a monthly payment, sells the property, or otherwise fails to perform as promised under the terms of the mortgage. (See also due-on-sale clause.)

adjustable-rate mortgage (ARM):

An ARM is a mortgage whose interest rate and monthly payments vary throughout its life. Usually, the ARM’s interest rate is tied to an index, which measures the overall market level of interest rates. If the overall level of interest rates rises, the interest rate of an ARM generally follows suit. Similarly, if interest rates fall, so does the mortgage’s interest rate and monthly payment. The amount that the interest rate can fluctuate is limited by caps (see also periodic cap and life cap). 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. For specifics on how an ARM’s interest rate is calculated, see formula and teaser rate.

adjusted cost basis:

The adjusted cost basis is important when you sell your house because this amount allows you to determine your profit or loss for tax purposes. You can arrive at the adjusted cost basis of your primary residence by adding the cost of the capital improvements that you’ve made to the home to the price that you originally paid for the home. Capital improvements, such as adding rooms or remodeling a bathroom, increase your property’s value and its life expectancy. Repairs that merely maintain the value of your home, such as fixing a leaky pipe, aren’t considered capital improvements.

adjusted sale price:

An adjusted sale price is the actual selling price of a house less the expenses of sale, such as real estate agents’ commissions, legal fees, and so on.

adjustment period or adjustment frequency:

This term refers to how often the interest rate for an adjustable-rate mortgage changes. Some adjustable-rate mortgages change every month, but one or two adjustments per year is more typical. The less frequently your loan rate shifts, the less financial uncertainty you face. But less frequent adjustments in your mortgage rate mean that you will probably have a higher teaser or initial interest rate. (The initial interest rate is also called the “start rate.”)

annual percentage rate (APR):

The APR measures the total cost of a mortgage, assuming that the borrower holds it for its entire life. It’s expressed as an annualized rate of all interest charges — which includes not only the base interest rate reflected in the monthly mortgage payments but also the points and any other add-on, upfront loan fees — spread out over the life of the loan. The APR is thus invariably higher than the rate of interest that the lender quotes for the mortgage, but it gives a more accurate picture of the likely cost of the mortgage. Keep in mind, however, that most mortgages aren’t held for their full 15- or 30-year terms, so the effective annual percentage rate is higher than the quoted APR because the upfront fees are spread out over fewer years.

appraisal:

Mortgage lenders require an appraiser to give an opinion of the fair market value of a house a homeowner wants to sell or refinance. This professional opinion helps to protect the lender from lending money on a house that’s worth less than the amount the buyers have agreed to pay for it or that the seller wants to obtain when refinancing the existing loan. For typical houses, the appraisal fee is several hundred dollars and is usually paid for by the borrower.

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:

This method of solving real estate contract disputes is generally less costly and faster than having lawyers duke it out in a court of law. In arbitration, the dissenting sides each present their perspectives 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. Unlike in a court of law, an arbitration can only be appealed based on a procedural defect — not because you don’t like the decision. Consult a real estate lawyer if you’re ever a party in an arbitration. (See also mediation of disputes.)

“as is”:

If you’re selling a property “as is,” you aren’t providing any guarantees or warranties to the buyer as to the condition of the property and, after the inspections are negotiated and the contingency removed, won’t make further allowances, credits, or price reductions for any problems with your property.

assessed value:

The assessed value is the value of a property for the purpose of determining property tax. This figure depends on the methodology used by the local tax assessor and, thus, may differ from the appraisal or fair market value of the property.

assumable mortgage:

Some mortgages don’t require a borrower to pay off the outstanding balance after the house sells. Instead, the new owner can simply take over the remaining loan balance and continue making payments under the loan’s original terms. Most lenders will charge the substitute borrowers an assumption fee (generally around 1 percent) and review their credit and loan application form. This arrangement benefits the buyers if the assumable mortgage has a lower interest rate than the current going interest rate for new loans. Most assumables are adjustable-rate mortgages. Fixed-rate, assumable mortgages are nearly extinct these days because lenders realize that they lose money on such mortgages when interest rates soar.

balloon loan:

This kind of loan requires level payments just as a 15- or 30-year fixed-rate mortgage does. However, even though the payments are based on a longer term (like 30 years), the full remaining balance is due much sooner, typically 3 to 10 years from the start date. Although balloon loans can save you money because they charge a lower rate of interest relative to fixed-rate loans, balloon loans are dangerous. If you don’t have a big chunk of cash sitting around somewhere to pay off the outstanding balance, you’ll be forced to refinance the loan or sell the house. Refinancing a loan is never a sure thing because your employment and financial situation may change, and interest rates may fluctuate. Beware of balloon loans!

bridge loan:

If you find yourself in the inadvisable situation of having to close on the purchase of another home before you sell your current one, you may need a bridge loan. Such a loan enables you to borrow against the equity that is tied up in your old house until it sells. The bridge loan is aptly named because such a loan may keep homebuyers financially above water during this period when they own two houses. Bridge loans are expensive compared to other alternatives, such as tapping into savings, borrowing from family or friends, or using the proceeds from the sale of the current house. In most cases, homebuyers need the bridge loan for only a few months in order to tide them over until they sell their house. Thus, the loan fees can represent a high cost (about 10 percent of the loan amount) for such a short-term loan.

broker:

A real estate broker is one level higher on the real estate professional totem pole than the real estate agent (or salesperson). Real estate agents can’t legally work on their own; a broker must supervise them. To become a broker in most states, a real estate salesperson must have a number of years of full-time real estate experience, meet special educational requirements, and pass a state-licensing exam. See also real estate agent and Realtor.

buydown:

In a buydown, the builder or house seller agrees to pay part of the homebuyer’s mortgage for the first few years. The term also refers to the practice of a seller paying a mortgage lender a predetermined amount of money to reduce his mortgage interest rate, thereby creating more attractive financing for a potential buyer. Or the buyer/borrower who wants to keep his payments low can “buy down” the payment by paying points up front. Veterans with low or modest incomes may be able to get buydowns through a VA (Department of Veterans Affairs) loan plan that’s available in some new housing developments.

buyer’s broker:

Historically, real estate brokers and real estate agents have owed an allegiance to the seller even when they were working with the buyer. A buyer’s broker, on the other hand, only owes allegiance to the buyer and doesn’t have an agent relationship with the seller. Buyer’s brokers are generally paid on a commission basis, just like listing agents, so they still have the same potential conflict of interest other commissioned real estate agents have — the higher the price of your next home, the more money the buyer’s broker makes because a broker’s commission is based on a percentage of the purchase price of the home you buy. There are plenty of good, ethical agents around, so be picky.

capital gain:

A capital gain is the profit, as defined for tax purposes, that a homeowner makes when he sells a house. For example, if you buy a house for $200,000 and then sell the house years later for $240,000, your capital gain is $40,000. See capital gains exclusion.

capital gains exclusion:

Normally, a capital gain generated by selling an asset is taxable. Thanks to the Taxpayer Relief Act of 1997, however, subject to meeting particular requirements, a significant portion of your gain on the sale of a primary residence is excludable from tax: up to $250,000 for single taxpayers and $500,000 for married couples filing jointly.

capital improvement:

A capital improvement is money you spend on your home that permanently increases its value and useful life — putting a new roof on your house, for example, rather than just patching the existing roof.

caps:

Adjustable-rate mortgages (ARMs) specify two different types of caps or limits on how much the interest rate of an ARM can move up or down. The life cap limits the highest or lowest interest rate that’s allowed over the entire life of a mortgage. The periodic cap limits the amount that an interest rate can change in one adjustment period. A one-year ARM, for example, may have a start rate of 5 percent with a plus or minus 2 percent periodic adjustment cap and a 6 percent life cap. In a worst-case scenario, the loan’s interest rate would be 7 percent in the second year, 9 percent in the third year, and 11 percent (5 percent start rate plus the 6-percent life cap) every year after that. If you were that unlucky, though, we’d recommend seeing an astrologer.

cash reserve:

Most mortgage lenders require that homebuyers have sufficient cash left over after closing on their home purchase to make the first two mortgage payments or to cover a financial emergency. As a seller, if you’re providing financing to the buyers, you should insist on this requirement, too.

Certified Distressed Property Expert (CDPE):

Real estate agents who successfully complete specialized training to help homeowners avoid foreclosure earn the Certified Distressed Property Expert (CDPE) designation from the Charfen Institute. If the owners can’t afford to maintain their mortgages, a CDPE can advise them about other options such as mortgage modification or deed in lieu of foreclosure. CDPE agents also receive specialized short-sale training so they can facilitate transactions in which a lender agrees to accept less than what is owed on the mortgage upon sale of the property.

closing costs:

Closing costs for buyers generally total about 2 to 5 percent of the home’s purchase price and include the loan origination fee or points, appraisal fee, 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. Despite the fact that a buyer needs a down payment to close on a home purchase, closing costs, technically speaking, don’t include the cash down payment, which is considered to be a separate item. Don’t neglect to consider these costs when weighing the purchase of your next dream home.

commission:

Commission is the percentage of the selling price of a house that’s paid to the real estate agents and brokers. For a house seller, the fact that the more the house fetches, the more agents get paid is good — this arrangement incites agents to go for the highest possible sale price for a house (unless selling at a lower price may result in a quicker sale). Remember that commissions are always negotiable.

common areas:

Common areas are the shared ownership portions of a condominium complex (such as the lobby, recreational areas, parking lot, underlying land on which buildings are located, and so on).

community property:

Community property is a way that married couples may take title to real estate. Community property offers two major advantages over joint tenancy and tenancy-in-common. First, community property ownership allows either spouse to transfer interests, by last will and testament or otherwise, to whomever he or she wishes. Second, if one spouse dies, the adjusted cost basis of the entire house is “stepped up” (increased) to equal its current fair market value for the surviving spouse. Assuming that the house has appreciated in value since it was originally purchased, this “stepped-up basis” reduces the taxable profit owed when the house is sold.

comparable market analysis (CMA):

A written analysis of comparable houses currently being offered for sale and comparable houses that sold in the past six months is called a comparable market analysis (CMA). In order to price your house appropriately, you need to know how much houses like yours are selling for. Identify houses “comparable” to yours that sold within the last six months, are in the immediate vicinity of your house, and are as similar as possible to your house in terms of size, age, and condition. By analyzing the asking prices of houses comparable to yours that are currently on the market, you can see whether prices are rising, flat, or declining.

condominium:

Condominiums are housing units within a larger development area in which you own your own unit, plus a proportionate share of the development’s common areas: the lobby, elevator, parking lot, and so on. Condominiums are a less-expensive form of housing than single-family homes. However, condominiums generally don’t increase in value as rapidly as single-family houses do because the demand for condos is lower than the demand for houses. And because condominiums are far easier for builders to develop than single-family homes are, the supply of condominiums often exceeds the demand for them. (Cool cats call condominiums “condos.”)

contingency:

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 relate to such factors as the buyer’s review and approval of property inspections or the buyer’s ability to get the mortgage financing that’s specified in the contract. Sellers may include contingencies as well, such as making the sale of their house contingent on their successful purchase of another home. If a contingency can’t be met, the party for whom it was established may legitimately withdraw from a contract.

convertible adjustable-rate mortgage:

Unlike a conventional adjustable-rate mortgage, a convertible adjustable-rate mortgage gives borrowers the option to convert to a fixed-rate mortgage, usually between the 13th and 60th month of the loan. For this privilege, convertible adjustable-rate mortgage loans have a higher rate of interest than conventional adjustable-rate mortgages, and a conversion fee is charged (the fee can range from a few hundred dollars to one percent or so of the remaining balance). Additionally, if borrowers choose to convert to a fixed-rate mortgage, they pay a slightly higher rate than they can get by shopping around for the best fixed rates available at the time they convert.

cooperative (co-op):

These buildings aren’t to be confused with “communes,” which are places in Oregon where hippies hang out together. Cooperatives are apartment buildings where residents own a share of a corporation whose main asset is the building that the residents live in. In high-cost housing areas, cooperatives (like their cousins, condominiums and townhouses) are cheaper alternatives to buying single-family houses. Unfortunately, cooperatives also resemble their cousins in that they generally lag behind single-family homes in terms of appreciation. Co-ops are also, as a rule, harder to sell and obtain loans for than condominiums.

cosigner:

If you have a checkered past in the credit world, you may need help securing a mortgage, even though you’re financially stable. A friend or relative can come to your rescue by cosigning, which literally means being indebted for, a mortgage. A cosigner can’t improve your credit report but can improve your chances of getting a mortgage. Cosigners should be aware, however, that cosigning for your loan adversely affects their future creditworthiness because your loan becomes what’s known as a contingent liability against their borrowing power.

cost basis:

See adjusted cost basis.

covenants, conditions, and restrictions (CC&Rs):

CC&Rs establish a condominium by creating a homeowners association, by stipulating how the condominium’s maintenance and repairs are 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, pet ownership, and whether residents can hang wet underwear on their decks.

credit report:

A credit report is the main report that a lender uses to determine an applicant’s creditworthiness. Applicants must pay for a lender to obtain this report, which the lender uses to determine the applicant’s ability to handle all forms of credit and to pay off loans in a timely fashion. If you provide financing to the buyer of your property, be sure to first run a credit report on the buyer/borrower.

debt-to-income ratio:

Before you trade up to a more expensive home, determine your price range. Lenders generally figure that you shouldn’t spend more than about 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 (debt), property tax, and insurance, in relation to your monthly income.

deed:

A deed is the document that transfers title to real property. Before you can give a buyer the deed to your property, you must show that you hold clear and legal title to the property. Also, the escrow holder must receive the mortgage company’s payment and the buyer’s payments for the down payment and closing costs.

default:

You default if you violate the terms of your mortgage agreement. In most cases, missing two or more monthly mortgage payments triggers default. Defaulting can lead to foreclosure on your house.

delinquency:

Delinquency occurs when a monthly mortgage payment isn’t received by the due date. At first borrowers are delinquent; then they’re in default.

depreciation:

See appreciation/depreciation.

disclosure statement:

See transfer disclosure statement.

down payment:

The down payment is that part of the purchase price the buyer pays in cash, upfront, and doesn’t finance with a mortgage. Generally, the larger the down payment, the better the deal that the buyer can get on a mortgage, and the more credibility he has with sellers. In most cases, a down payment equal to 20 percent of the property’s purchase price qualifies a buyer for the best available mortgage programs.

due-on-sale clause:

A due-on-sale clause contained in the mortgage entitles the lender to demand full payment of all money due on a loan secured by the property when a borrower sells or transfers title to the property.

earnest money:

Earnest money is a home buyer’s “good faith” deposit that accompanies a written purchase offer.

earthquake insurance:

Californians aren’t the only people who have to worry about the ground shaking; other areas in the United States are also prone to earthquakes. The dwelling coverage of most homeowners insurance policies doesn’t cover damage caused by an earthquake, so homeowners must purchase an earthquake insurance rider to their homeowners policy or a separate earthquake policy to protect them from this risk.

encumbrance:

An encumbrance is a right or interest someone else holds in a homeowner’s property that affects its title or limits its use. A mortgage, for example, is a money encumbrance that affects a property’s title by making it security for repayment of the loan. A right-of-way for someone to pass over land or an easement granted to the local utility company to run sewer lines under a property are examples of nonmonetary encumbrances. These encumbrances, if recorded, should all be revealed by your preliminary title report.

equity:

Equity is the difference between the market value of a house and the amount the homeowner owes on it. For example, if your house is worth $260,000 and you have an outstanding mortgage of $190,000, your equity is $70,000.

escrow:

Escrow is the holding — by a neutral third party called, naturally, an escrow officer — of important documents and money related to the sale of a house. After a seller accepts a buyer’s offer to purchase property, the buyer doesn’t immediately move in. A period follows when contingencies have to be met or waived. During this period, the escrow service holds the buyer’s down payment and documents pertaining to the sale. “Closing escrow” means the deal is completed. Among other duties, the escrow officer makes sure that all the players in the transaction — mortgage companies, real estate agents, and, of course, the seller — are paid the amount that’s due them. The escrow officer also sees to it that the deed is properly notarized and recorded. This is the moment the property transfers from seller to buyer.

exclusive agency listing:

An exclusive agency listing is a listing contract between property owners and a real estate broker that’s very similar to an exclusive right-to-sell listing except that the property owners specifically reserve the right to sell the house themselves without compensating the listing broker if they find the buyer. (See also listing contract.)

exclusive right-to-sell:

An exclusive right-to-sell listing is a listing contract between a property owner and a real estate broker in which the property owner agrees to compensate the listing broker if anyone, including the property owner, sells the house during the listing period. (See also listing contract.)

fair market value (FMV):

FMV is the price a market-educated buyer will pay and a market-savvy seller will accept for property given that neither the seller nor the buyer is under duress caused by a divorce, an unanticipated job transfer, or some other circumstance that puts either party under pressure to perform quickly.

Fannie Mae:

See Federal National Mortgage Association.

Federal Home Loan Mortgage Corporation (FHLMC):

The FHLMC (or Freddie Mac) is one of the best-known institutions in the secondary mortgage market. Freddie Mac buys mortgages from banks and other mortgage-lending institutions and, in turn, sells these mortgages to investors. These loan investments are considered safe because Freddie Mac buys mortgages only from companies that conform to its stringent mortgage regulations, and Freddie Mac guarantees the repayment of principal and interest on the mortgages that it sells.

Federal Housing Administration (FHA) mortgage:

FHA mortgages are marketed to people with modest means. The main advantage of these mortgages is that they require a small down payment (usually between 3 and 5 percent of a home’s purchase price). FHA mortgages also offer competitive interest rates — typically 0.5 to 1 percent below the interest rates on other mortgages. The downside of an FHA mortgage is that the buyer must purchase mortgage default insurance (see private mortgage insurance).

Federal National Mortgage Association (FNMA):

The FNMA (or Fannie Mae) is one of the best-known institutions in the secondary mortgage market. Fannie Mae buys mortgages from banks and other mortgage-lending institutions and, in turn, sells them to investors. These loan investments are considered safe because Fannie Mae buys mortgages only from companies that conform to its stringent mortgage regulations, and Fannie Mae guarantees the repayment of principal and interest on the loans that it sells.

fixed-rate mortgage:

A fixed-rate mortgage lets you lock into an interest rate (for example, 6.5 percent) that never changes during the entire life (term) of a 15- or 30-year mortgage. The mortgage payment is the same amount each and every month. Compare fixed-rate mortgages with adjustable-rate mortgages.

flood insurance:

If you suspect even a remote chance that your area may flood, having flood insurance is prudent. Flood protection is not generally included in your homeowners insurance policy. In federally designated flood areas, flood insurance is required in order to obtain conventional mortgage financing.

foreclosure:

Foreclosure is the legal process by which a mortgage lender takes possession of and sells property to attempt to satisfy indebtedness. If you default on your loan and the lender deems that you’re incapable of making payments, you may lose your home to foreclosure. Being in default, however, doesn’t always lead to foreclosure. Some lenders are lenient and help you work out a solution if they see that your financial problems are temporary.

formula:

Formula is jargon for the method used to calculate the revised interest rate on an adjustable-rate mortgage. Add the margin to the index to get the adjusted interest rate (margin + index = interest rate).

For Sale By Owner (FSBO):

A FSBO property isn’t listed for sale through a real estate broker. Instead, the homeowner tries to sell the home on his own.

Freddie Mac:

See Federal Home Loan Mortgage Corporation.

graduated-payment mortgage:

With a graduated-payment mortgage, monthly payments are increased by a predetermined amount and schedule. For example, your monthly payment increases 5 percent annually for seven years. Thereafter, your payments stay constant for the rest of your loan’s term.

home-equity loan:

A home-equity loan is technical jargon for what used to be called a second mortgage. With this type of loan, a homeowner borrows against the equity in her house. If used wisely, a home-equity loan can pay off consumer debt, which is usually at a higher interest rate than a home-equity loan and isn’t tax-deductible. Homeowners can also use home-equity loans for other short-term needs, such as for payments on a remodeling project.

homeowners insurance:

This type of insurance is required and necessary — period. A homeowners insurance policy protects what’s likely your most valuable asset — your home. The most fundamental component of the policy is the “dwelling coverage” that covers the cost to repair or rebuild your house in the event of fire, storm, or other insured real property damage. The liability insurance portion of this policy protects you 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 insurance or earthquake insurance if you’re in an area susceptible to these natural disasters. As with other types of insurance, get the highest deductibles with which you are comfortable.

home warranty plan:

A home warranty plan is a type of insurance that covers repairs to specific parts of a house for a predetermined time period. Because home warranty plans typically cover small-potato items, such plans generally aren’t worth buying. Instead, spend your money on a good house inspection before you buy the house in order to identify any major problems, such as trouble with electrical or plumbing systems.

house inspection:

Like homeowners insurance, we think that a house inspection is a necessity when you’re buying and a smart thing to do when you’re selling. The following items 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 premarketing house inspection can save you money and reduce hassles by helping you find corrective work problems prior to putting your house on the market. You can then decide whether you will make the necessary repairs or simply disclose them to prospective buyers.

hybrid loan:

A hybrid loan combines the features of fixed-rate and adjustable-rate mortgages. The initial interest rate for a hybrid loan may be fixed for the first three to ten years of the loan (as opposed to only six to twelve months for a standard adjustable-rate mortgage), and then adjusted biannually or annually. The longer the initial interest rate remains the same, the higher the interest rate is. These hybrid loans are best for people who plan to own their house for a short time (less than ten years) and who don’t like the volatility of a typical adjustable-rate mortgage.

index:

An index measures the current level of market interest rates. It is used to determine the new interest rate when adjustable-rate mortgages adjust. Adding the index to the margin is the formula for determining the specific 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 2 percent and the margin on your loan is 2.25 percent, your interest rate is 4.25 percent.

interest rate:

Interest is what lenders charge borrowers to use their money. The greater the risk of not getting the money back, the more a lender charges to use it. In general, interest charges are accrued as a percentage of the amount borrowed; that percentage is known as the interest rate.

joint tenancy:

Joint tenancy is 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. Some of the limitations of joint tenancy are (first) that each person must own an equal share of the house, (second) that the right of survivorship is terminated if one person transfers his or her interest in the property by deed to a third party, and (third) joint tenants must obtain equal shares of the property with the same deed at the same time. As an owner, you can’t add another joint tenant, whereas you can add a tenant to a tenancy-in-common.

lease-option:

A property that tenants can lease with an option to purchase at a later date has a lease-option contract. These contracts generally require an upfront payment (called “option consideration”) to secure the purchase option. The consideration is usually credited toward the down payment when the tenant exercises her option to buy the home. An important factor in a lease-option agreement is what portion of the monthly rent payments (typically one-third) is applied toward the purchase price if the tenant buys. Rent is usually slightly higher because of the lease-option privilege.

leverage:

Remember playing with levers in high school physics? Using leverage, you could exert a great deal of force with little effort. Your flimsy-looking cash can also function like a crowbar when you borrow money to help you make an investment. For example, suppose that you make a 20 percent down payment on a $200,000 house and borrow the $160,000 difference. If you consider the fact that you control a $160,000 property with only a $40,000 investment, you can already see leverage at work. But the potential power of that leverage comes into play if the house appreciates — say, to $240,000. Now you’ve made a $40,000 profit on a $40,000 investment — a 100 percent return, thanks to leveraging. However, if you find that your house has declined in value since you bought it, you’re painfully aware that leverage cuts both ways. (See also return on investment.)

lien:

A misspelling of the word “line” (just kidding). In real estate, a lien is a legal claim or encumbrance on a property that’s used as security for repayment of an outstanding debt such as a mortgage, unpaid taxes, money owed to a contractor, and so on. Liens must be paid off before a property can be sold or title transferred to a subsequent buyer. The liens that are a matter of public record appear on a property’s preliminary title report.

life cap:

The maximum amount that an adjustable-rate mortgage interest rate and monthly payment can fluctuate up or down during the duration of the loan is determined by the life cap. The life cap is different from the periodic cap that limits the extent to which an interest rate can change up or down in any one adjustment period.

liquidated damages:

In many real estate contracts, buyers and sellers, at the beginning of the transaction, agree on the liquidated damages — how much money will be awarded to one party if the other party violates the terms of the contract without good cause. Buyers, for example, generally limit their losses to the amount of their deposit. Discuss the advisability of using the liquidated damages provision with a lawyer or real estate agent.

listing broker:

The real estate broker who lists a property for sale and who, if the terms of the listing contract are satisfied, will be compensated, typically in the form of a commission on the selling price of the house, when the property sells.

listing contract:

This is the employment contract between a property seller and a real estate broker. Under the terms of a listing contract, the property seller agrees to compensate the broker for procuring a ready, willing, and able buyer for the property.

listing presentation:

A proposal by a real estate broker or agent outlining how a property would be marketed and recommending an asking price based on a comparable market analysis.

lock-in:

A lock-in is a mortgage lender’s written commitment to 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 don’t lock-in unless the homebuyer has made an offer on the property and the property has been appraised. For the privilege of locking in the rate in advance of the closing of a loan, homebuyers may pay a slight interest-rate premium.

margin:

The margin is the amount that’s added to the index in order to calculate the 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 during the life of the loan. See formula.

market value:

See fair market value.

marketable title:

A title to property that’s free and clear of objectionable liens and encumbrances and thus acceptable to buyers and mortgage lenders.

mechanic’s lien:

An encumbrance recorded against title to a property by contractors or workmen who claim that the owner still owes them money for labor or materials expended to improve the property.

mediation of disputes:

Because mediation is faster and less expensive than arbitration or litigation in a court of law, mediation is often the first formal step taken to resolve simple contract disputes. In mediation, buyers and sellers present their differences to a neutral mediator who doesn’t 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. Statistically speaking, over 80 percent of the cases that go through mediation are resolved at that level. Parties who seek mediation spare themselves the additional time and money required to pursue their differences in arbitration or a court of law. (See also arbitration of disputes.)

mortgage broker:

A mortgage broker buys mortgages wholesale from lenders, marks the mortgages up (typically from 0.5 to 1 percent), and then sells them to buyers. A good mortgage broker is most helpful for people who don’t shop around on their own for a mortgage or for people who have blemishes on their credit reports.

mortgage life insurance:

Mortgage life insurance guarantees that the lender will get the loan money back in the sad event that the borrower meets an untimely demise. If you need life insurance, buy low-cost, high-quality term life insurance instead of mortgage life insurance, which is basically overpriced term insurance. We don’t recommend the purchase of mortgage life insurance.

multiple listing service (MLS):

An MLS is a cooperative arrangement among real estate brokers in a particular area to share their property listings with each other. Usually a computer-based service, an MLS allows member brokers and agents to track all property listed for sale with cooperating brokers who participate in the MLS.

negative amortization:

Although it sounds like it, this term isn’t from science fiction. Still, you can say that it describes a kind of black hole. Negative amortization occurs when an outstanding mortgage balance increases despite the fact that the borrower is making the required monthly payments. Usually this condition only happens with adjustable-rate mortgages that cap the increase in the monthly payment but do not cap the interest rate. Therefore, if the interest rate rises high enough, the monthly payments won’t cover all the interest that the borrower actually owes. When this happens, the unpaid interest is added to the principle (what you owe!). If you’ve ever watched your credit-card balance snowball as you made only the minimum monthly payment, then you already have experience with this phenomenon. Avoid negative amortization loans!

open listing:

An open listing is a nonexclusive listing contract that may be given to any number of real estate brokers. A seller is obligated to compensate the first broker who either secures a buyer ready, willing, and able to meet the terms of the listing contract or procures an acceptable offer. If the seller finds the buyer, he doesn’t have to pay any of the brokers a commission.

origination fee:

See points.

partnership:

A partnership is a way for unmarried people to take title of a property together. Partnerships most often occur among people who have a business relationship and who buy the property as either a business asset or for investment purposes. If you intend to buy property with partners, have a real estate lawyer prepare a written partnership agreement for all the partners to sign before making an offer to purchase.

periodic cap:

This cap limits the amount that the interest rate of an adjustable-rate mortgage can change up or down in one adjustment period. See also caps.

points:

Also known as the loan’s origination fee, points are interest charges paid upfront when a borrower closes on a loan. The charges are calculated as a percentage of the total loan amount — one point is equal to 1 percent of the loan amount. For a $100,000 loan, one point costs $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 you pay at the time that you 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 borrowers can make additional payments to pay the loan off faster if they have the inclination and the money to do so. A prepayment penalty discourages borrowers from doing this by penalizing them for early payments (although most lenders allow 20 percent of the balance to be paid off each year without penalty). Some states prohibit lenders from penalizing people who prepay their loans. Avoid mortgages that penalize prepayment!

principal:

The principal is the original amount that a person borrows for a loan. If a homebuyer borrows $180,000, the principal is $180,000. Each monthly mortgage payment consists of a portion of principal that must be repaid plus the interest that the lender is charging for the use of the money. During the early years of a mortgage, the loan payment is primarily interest. Gradually, over time, more and more of the monthly payments go toward principal and less toward interest.

private mortgage insurance (PMI):

If the down payment is less than 20 percent of a home’s purchase price, the borrower will probably need to purchase PMI (also known as “mortgage default insurance”). Lenders feel that homeowners who can only come up with small down payments are more likely to default on their loans. Therefore, lenders make these homeowners buy PMI, which reimburses them the loan amount in case the borrower does default. Private mortgage insurance can add hundreds of dollars per year to loan costs. After the equity in the property increases to 20 percent, borrowers no longer need the insurance. Don’t expect the lender to automatically drop the policy. The borrower should petition the lender as soon as she reaches the equity threshold. Don’t confuse this insurance with mortgage life insurance.

probate sale:

A probate sale is the sale of a home that occurs when a homeowner dies and the property is to be divided among inheritors or sold to pay debts. The executor of the estate organizes the probate sale, and a probate court judge oversees the process. The highest bidder receives the property.

property tax:

You 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. As one of the conditions of selling a house, property taxes are prorated (see prorations) and must be paid up to the date of sale.

prorations:

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 seller money for property taxes that the seller paid in advance, the prorated amount of money due the seller at the close of escrow appears as a credit to the seller from the buyers.

real estate agent:

Real estate agents are the worker bees of real estate sales. Also called “salespeople,” agents are supervised by a real estate broker. Agents are licensed by the state; typically their pay is from commissions generated by selling property.

Realtor:

A Realtor is a real estate broker or agent who belongs to the National Association of Realtors, a trade association whose members agree to its ways of doing business and code of ethics. The National Association of Realtors offers its members seminars and courses that deal with real estate topics.

redlining:

Redlining is the discriminatory refusal to provide mortgage loans or homeowners insurance policies in certain neighborhoods due to a higher rate of problems with loans and insurance policies in such areas. Redlining is illegal!

refinance:

Refinance, or “refi,” is a fancy word for taking out a new mortgage loan (usually at a lower interest rate) to pay off an existing mortgage (generally at a higher interest rate). Although this step can be lucrative in the long run, refinancing can be an expensive hassle in the short run. Carefully weigh the costs and benefits of refinancing.

return on investment (ROI):

The return on investment is the percentage of profit that an investor makes on an investment. If, for example, you put $1,000 into an investment and a year later sell the investment for $1,100, you make $100. You calculate ROI by dividing the profit ($100) by your original investment ($1,000), which equals a 10 percent return. (See also leverage.)

reverse mortgage:

A reverse mortgage is a way for elderly homeowners, especially those who are low on cash, to tap into their home’s equity without selling their home or moving from it. Specifically, a lending institution makes a check out to a homeowner each month, and the homeowner can use the check as he wants. This money is really a loan against the value of the home. Because it’s a loan, the money is income tax free when the homeowner receives it. The downside of these loans is that they deplete the equity in the estate, the fees and interest rates tend to be on the high side, and some require repayment within a certain number of years.

second mortgage:

A second mortgage is a mortgage that ranks after a first mortgage in priority of recording. In the event of a foreclosure, the proceeds from the sale of the house are used to pay off the loans in the order in which they were recorded. Homeowners can have a third (or even a fourth) mortgage, but the further down the trough the mortgage is, the greater the risk that no leftovers will be available to feed it — hence, the higher interest rate that homeowners pay on junior mortgages. (See also home-equity loan.)

the 72-hour clause:

The 72-hour clause is commonly inserted into real estate purchase offers when the purchase of a home is contingent on the sale of the buyer’s current house. The seller accepts the buyer’s offer but reserves the right to accept a better offer if one should happen to come along. However, the seller can’t do this arbitrarily. If the seller receives an offer that he wants to accept, he must notify the buyer of that fact in writing. The buyer then 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.

subagents:

Many commonly used listing contracts permit the listing broker to delegate the work of procuring a buyer for the property to her salespeople as well as to cooperating brokers. Historically, these people were classified as subagents of the listing agent. The problem with this practice was that the agent representing the buyer was “legally” working for the seller — a huge conflict of interest. Today the practice of subagency is dead in most states. Buyer’s agents represent buyers, and listing agents represent sellers.

subprime loan:

The term applied to loans offered to borrowers viewed as riskier. Lenders charge higher rates on such loans.

tax deductible:

Tax deductible refers to payments that people may deduct against federal and state taxable income. The interest portion of mortgage payments, loan points, and property taxes are tax deductible. Taxpayers can use tax deductible items to shelter some employment income, which is not!

teaser rate:

Otherwise known as the initial interest rate, the teaser rate is the attractively low interest rate that most adjustable-rate mortgages start with. Don’t be sucked into a mortgage because it has a low teaser rate. Look at the mortgage’s formula (index + margin = intrest rate) for a more reliable indication of 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 probably 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 and go onto the deed at the same time — see joint tenancy). Tenancy-in-common doesn’t require co-owners to own equal shares of the property. Tenancy-in-common also doesn’t provide for the right of survivorship that automatically passes the 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 a property’s title against claims that may be made against the ownership of the property. The extent of the coverage depends on whether the homeowner has an owner’s standard coverage or extended-coverage title insurance policy. Title insurance is not mandatory but is encouraged in most purchase situations. To get a mortgage, homeowners also have to buy a lender’s title insurance policy to protect the lender against title risks.

top producer:

A top producer is a real estate agent who sells a great deal of real estate. Just because someone is a top producer, however, doesn’t guarantee that she’s your best choice as a listing agent. Make sure that the agent has enough time to serve you properly, that the agent knows property values in your area, and that the agent has been successful selling properties like yours.

townhouses:

These homes are row or attached homes. Townhouses are cheaper than single-family homes because they use common walls and roofs, and they save land. In terms of investment appreciation potential, townhouses lie somewhere between single-family homes and condominiums.

transfer disclosure statement (TDS):

Some states require that sellers give prospective buyers a written disclosure regarding all known property defects and all known material facts that may affect the property’s value or desirability. Some sellers resist full disclosure, fearing that it will cost them money when they sell. While fully disclosing all known defects can reduce the sales price, it is the best insurance against post-close lawsuits or arbitrations — which can be far more expensive than the actual cost of repair. So if you know for a fact that the world’s largest garbage dump will be built directly behind your house next year, ’fess up.

VA (Department of Veterans Affairs) loans:

Congress passed the Serviceman’s Readjustment Act, commonly known as the GI Bill of Rights, in 1944. One of its provisions enables the VA to help eligible people on active duty and veterans obtain mortgages on favorable terms (generally 0.5 to 1 percent below the rate currently being charged on conventional loans) to buy primary residences. Like the Federal Housing Administration (FHA), the VA has no money of its own. It guarantees loans granted by conventional lending institutions that participate in VA mortgage programs.

zoning:

Certain city and county government bodies have the power to regulate the use of land and buildings. For example, the neighborhood where your house is located is probably zoned for residential use. It most likely also has zoning codes or ordinances to regulate building heights, yard sizes, and the percentage of lot coverage by buildings. Thanks to zoning codes, you don’t have to worry about an auto wrecking shop being built next door to your house.