Real Estate Glossary
adjustable rate mortgage
An adjustable rate mortgage or variable rate mortgage is a loan secured on a property whose interest rate and so monthly repayment vary over time. Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest rates rise. For those who plan to move within a relatively short period of time (three to seven years), they are attractive because they often include a lower, fixed rate of interest for the first three, five, or seven years of the loan, after which the interest rate fluctuates.
Adjustable rate mortgages, like other types of mortgage, may offer the ability to repay principal (or capital) early without penalty. Early payments of part of the principal will reduce the total cost of the loan (total interest paid), and will shorten the amount of time needed to pay off the loan. Early payoff of the entire loan amount (refinancing) is often done when interest rates drop significantly.
A real estate appraisal is a service performed, by an appraiser, that develops an opinion of value based upon the highest and best use of real property. The highest and best use is that use which produces the highest possible value for the property. This use must be profitable and probable. Also of importance is the definition of the type of value being developed and this must be included in the appraisal, ie fair market value, condemnation value, quick sale value, etc.
A real estate broker is in the business of brokering real estate transactions; that is, finding sellers for those who want to buy real estate and finding buyers for those trying to sell real estate. Real estate brokers and their salespersons assist sellers in marketing their property and selling it for the highest possible price under the best terms and assist buyers by helping them purchase property for the best possible price under the best terms. In many jurisdictions a person is required to have a license in order to be remunerated for services rendered as a real estate broker. In particular, any of the following descriptions could refer to a real estate broker in the USA:
- A person owning, managing, or being in charge of a real estate brokerage firm, even if the broker just works for him- or herself.
- The real estate brokerage itself. The brokerage is the firm or business of the broker which can also be called a real estate agency.
- A licensed real estate professional who has obtained a broker's license (which entitles them to operate a real estate brokerage). By default, a real estate broker of this kind has already met the requirements of "salesperson" or "agent" licensure. A real estate broker can still be designated as such without owning a real estate brokerage.
- Some people may refer to any licensed real estate agent as a real estate broker. A licensed real estate agent is a professional who has obtained either a real estate salesperson' s license or a real estate broker's license.
Closing is the final step in executing a real estate transaction.
The closing date is set during the negotiation phase, and is usually several weeks after the offer is formally accepted. On the closing date, the parties consummate the purchase contract, and ownership of the property is transferred to the buyer. In most jurisdictions ownership is officially transferred when the contract is registered.
Several things happen during closing:
- The buyer (or their bank) delivers a check for the purchase price.
- The seller signs the deed over to the buyer, and gives them the keys.
- A lawyer or notary registers the new deed with the local land registry office.
- The seller receives a check for the proceeds of the sale, less closing costs and mortgage payouts.
Closing typically happens in escrow, which means that a lawyer, real estate broker or other trusted party gets the money and the signed deed, and arranges for the transfer. This is primarily so that the seller can give up ownership of the property, and the buyer can hand over the payment, without both parties having to be there at the same time. Escrow ensures an orderly transaction, or if something goes wrong, an orderly termination of the agreement.
Real property in most jurisdictions is conveyed from the seller to the buyer through a real estate contract . The point in time at which the contract is actually executed and the title to the property is conveyed to the buyer is known as the "closing". It is common for a variety of costs associated with the transaction (above and beyond the price of the property itself) to be incurred by either the buyer or the seller. These costs are typically paid at the closing, and are known as closing costs .
Examples of typical closing costs might include:
- Title service cost(s), paid by either party according to the contract but by default seller may pay the majority, for title search, title insurance, and possibly other title services. In some cases the attorney may do the title search or the title service and attorney fees may be combined. Required by institutional/commercial lenders and often by the real estate contract.
- Recording fees, paid by either party, charged by a governmental entity for entering an official record of the change of ownership of the property. Required by the government for recording the deed.
- Brokerage Commission, paid by the seller to a Real Estate Broker, to compensate the Broker(s) involved in the sale for their services in marketing the property, finding a buyer, and assisting in the negotiations. Brokerage commissions are usually computed as a percentage of the sale price, and are established in a listing agreement between the seller and the listing broker. The listing broker may offer Buyer Agents a portion of their commission as an incentive to find buyers for the property. Payment is required if real estate brokerage service was used. This is often one of the largest closing costs.
- Mortgage Application Fees, paid by the buyer to the lender, to cover the costs of processing their loan application. In some cases, the buyer would pay the lender the application directly and prior to closing, while in other cases the fee is part of the buyer's closing costs payable at closing.
- Points, paid by the buyer to the lender. Points are a form of pre-paid interest, charged by the lender as an alternative to charging a higher rate of interest on the mortgage loan. One point equals one percent of the loan principal.
- Appraisal Fees, usually paid by the buyer (although occasionally by the seller through negotiation), charged by a licensed professional Appraiser. Many lenders will require that an appraisal be performed as a condition of the mortgage loan. The purpose of this appraisal is to verify that the sale price of the property (upon which the underwriting of the loan is based) is equal to or less than the fair market value of the property.
- Inspection Fees, usually paid by the buyer (although occasionally by the seller), charged by licensed home, pest, or other inspectors. Some lenders require inspections to verify that the property is in good condition, which is necessary to assure that the property will retain the necessary collateral value to secure the mortgage loan.
- Home Warranties, paid by either the buyer or the seller. Warranties are available on resale homes insuring major household systems against repair or replacement for the buyer's initial year of ownership. Sellers will sometimes offer these warranties as a marketing strategy, or buyers can elect to purchase them at closing.
- Pre-paid Property Insurance, paid by the buyer. Lenders will typically require that a mortgaged property be insured at all times throughout the life of the mortgage, and will usually require that the first full year's property insurance premium be paid in advance by the buyer. If the buyer has not already paid the insurance company directly, this would become another closing cost payable at closing.
- Pro-rata property taxes, paid by the seller, the buyer, or both. Most (but not all) jurisdictions assess taxes on real property, which are usually payable at a specified date annually. Since all but a tiny fraction of real estate transactions close on a date other than this one specified annual date, most transactions must include an adjustment to assure that both the seller and the buyer end up paying their share of the annual property tax, proportionate to the percentage of the year that each has ownership of the property. Usually required by institutional/commercial lenders and by the real estate contract.
- Pro-rata Homeowner Association Dues, paid by the seller, buyer, or both. If the property is covered by a Homeowner Association (HOA), the HOA will normally be funded by dues assessed against each property owner. Again, since the ownership of the seller and buyer are each fractional in the year of the transaction, there must be an adjustment made so that each owner pays their proportional share. Often required by institutional/commercial lenders and by the real estate contract.
- Pro-rata Interest, paid by the buyer. The monthly mortgage payment is calculated and payable on a specified day each month. If the closing does not actually fall on that specified date (which is usually the case), then an adjustment must be made to calculate the interest on the loan for the number of extra days until the first payment is due.
Federal law requires that all residential transactions financed by a mortgage have all closing costs documented in detail upon the standard HUD-1 form.
An earnest payment (sometimes called earnest money or simply earnest) is when a buyer gives of something of value (money or otherwise) to a seller at the time an agreement is made and it is accepted by the seller as an indication that the agreement is complete. For the gift to be earnest it must be given outright by the buyer to the seller with no intention of ever getting it back.
Typically, if the offer is accepted, the earnest is kept by the seller and subtracted from the purchase price, or is kept in escrow until closing, when it is applied to the buyer's portion of the remaining costs. If the offer is rejected, the earnest money is usually returned. If the buyer retracts the offer, the earnest is forfeited.
An encumbrance is a legal term of art for anything that affects or limits the title of a property, such as mortgages, leases, easements, liens, or restrictions.
Escrow is a legal arrangement whereby a thing (property) is delivered to a third party (called an escrow agent) to be held in trust pending a contingency or the fulfillment of a condition or conditions in a contract. Upon that event occurring, the escrow agent will deliver the thing to the proper recipient, otherwise the escrow agent is bound by her or his fiduciary duty to maintain the escrow account.
Real estate agents are in some jurisdictions considered to act as escrow agents when they accept deposits for the purchase of real property.
good faith estimate
A mortgage lender is required by the Federal Real Estate Settlement Procedures Act to provide you with a good faith estimate of the fees due at closing within three days of applying for a loan.
These mortgage fees, also called settlement costs, cover every expense associated with your home loan: inspections, title insurance, taxes and other charges.
home owners insurance
Home insurance, or homeowners insurance, is an insurance policy that combines insurance on the home, its contents, loss of use (additional living expenses) and, often, the other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home.
The cost of homeowners insurance scales upward depending on what it would cost to replace the house, and which additional "riders", meaning additional items to be insured, are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims are not paid due to earthquakes, floods, "Acts of God", or war (whose definition typically includes a nuclear explosion from any source). Special insurance can be purchased for these possibilities, including flood insurance and earthquake insurance.
The home insurance policy is usually a term contract, which is a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station, or if the house is equipped with fire sprinklers and fire alarms.
In the United States, most home buyers borrow money in the form of a mortgage, and the mortgage lender always requires that the buyer purchase homeowners insurance as a condition of the loan, in order to protect the bank if the home were to be destroyed. Anyone with an insurable interest in the property should be listed on the policy.
A second mortgage is a secured loan that is subordinate to another loan against the same property. More specifically, the second loan in sequence.
In real estate, a property can have multiple loans against it. The loan which is registered with county or city registry first is called the first mortgage. The loan registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.
Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage gets any money. Thus, second mortgages are riskier for the lender, who generally charges a higher interest rate.
A policy of title insurance is a contract of indemnity between the insurance company and the owner of an interest in real property. In plain English, this means that in the event that the insured owner of an interest in the insured property suffers an actual or threatened monetary loss, due to a title defect, lien or other matter of public record created prior to the effective date of the policy, that is not excluded as an exception to the policy, the title insurer will defend the insured against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Typically the real property interests insured are fee simple ownership or a mortgage .
Just as lenders require hazard (fire) insurance and other types of insurance coverage to protect their investment, most first lien lenders will also require title insurance as security for their investment in real estate. Junior mortgage lenders may depending on the amount of the loan choose to rely on a title search which typically provides less legal assurances to the lender than the full title insurance policy. As such, certain ownership interests (such as those obtained by a quitclaim deed) will not be insurable.
A quitclaim deed is a term used in property law to describe a document by which a person disclaims any interest the grantor might have in a piece of real property, and passes that claim to another person (the grantee). Unlike a typical deed, a quitclaim deed neither warrants nor professes that the grantor's claim was actually valid. While a grant deed is normally used for all real estate sales and transfers, quitclaim deeds are sometimes used for transfers between family members, gifts, and other special or unusual circumstances.
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