Definitions in personal finance and investment: Real estate purchase and lending terms

Definitions in personal finance and investment: Real estate purchase and lending terms

Following is a list of terms related to the process of purchasing a home, mortgages and refinancing.

If you would like to suggest more terms to add to this list, please email me at [email protected].

Adjustable Rate Mortgage

A mortgage loan on which a special low introductory rate is granted for a set period of time. After that period of time expires, the loan rate will be changed to a specifically predefined variable rate. To read more about these loans, click here.


The process of defining the value of a property, performed by an authorized person (an expert). The appraisal is not to be confused with the Home inspection. An appraisal is a requirement of the lender, but its cost must be paid by the borrower. There are two types of appraisal:

The sales comparison (or drive-by) appraisal, in which the appraiser uses the sale prices of three or four comparable homes in the neighborhood to calculate –taking into account lot size, home size, the type and style of the home, and its age- the value of the home being appraised.

The cost approach, which is used on newly built properties. This appraisal is performed by calculating the cost of replacing the home on the same property, were it to be destroyed.

Closing Costs

The expenses, outside the purchase and sale price of a property, which both the buyer and the seller will incur for the purchase/sale to take place. Examples of these costs are: credit report charges, appraisal fees, discount points, loan origination fees, title searches, title insurance, taxes, and deed-recording fees.

Condominium Fee (also known as condo fee or strata fee)

When purchasing an apartment or condominium this figure represents a mandatory, non-negotiable fee that you will be paying to the common fund that manages your building’s expenses. Commonly this fee covers the payment for maintenance of common areas, some utilities, and a reserve fund for emergency expenses.

Daily Interest Rate

The amount of interest that accrues daily on a current mortgage loan principal balance. The Daily Interest Rate on a mortgage is calculated for each day of the monthly term. That is accomplished by dividing the annual rate into 365 –the number of days in a year- and multiplying that result by the current balance (the principal) of the loan. This calculation is performed the first day after a payment has been made and after that, it is added to the principal for every single day until the next payment. When that next payment is made, it is divided to pay the interest due first, then the escrow requirements, and finally, the principal.

Down Payment

A payment made by the borrower upon the purchase of a home that is performed in combination with a mortgage loan. It commonly represents a percentage of the full purchase price of the home, and it ranges from 10% to 20% of the value. The down payment offers a means to lower the monthly loan payments.


An account created in the borrower’s name by a mortgage lender when creating a mortgage. Into it the borrower –as part of the monthly mortgage payment- deposits funds for property taxes and any mandatory insurance. When those fees become due, they are paid by the lender using the funds in escrow.

Good Faith Estimate (GFE)

An early summary of a mortgage loan given to the borrower by the lender within three days of the first application. It is given by law, and it shows all the expected costs that will be incurred in the transaction of the loan. It must be noted that is it an early quote, given for information purposes only, and not legally binding.

Home Equity

The monetary value difference between the appraised value of a property and the accumulated balance of all loans secured by that property.

Home Equity Line of Credit (or HELOC)

A revolving line of credit obtained using the equity on a home; it is a type of second trust loan. It is disbursed by means on advances made at the borrower’s discretion, and has a fixed repayment term.

Home inspection

An inspection performed by a certified inspector in relation to the purchase of a property, to certify that its value is not affected by damage or issues. During the inspection the property is examined for possible problems on the roof, foundation, heating and air conditioning systems, the plumbing, the electrical work and wiring, water, and sewage. The inspector will also search for evidence of any pest, fire or water damage and any other type of damage that may affect the value of the property. This inspection is usually paid by the buyer, as it is performed for his or her benefit.

Homeowners Insurance

A type of insurance that protects a home against damages to the house itself or its contents. It also provides coverage for accidents in the home or property. It is a requirement that most lenders place as part of a mortgage agreement. The two most basic types of insurance to obtain a mortgage are labelled HO-3 which protects single family homes and townhouses, and HO-6, for condominiums.

HUD – 1

Also known as the Closing Sheet or Settlement Form. This is a form used by law at the time of closing of a real estate purchase loan. On it are listed all the charges involved in the transaction both on the buyer’s –always listed as Borrower even if no loan is involved- and seller’s side. It must be provided to the buyer at least one day before settlement.Interest (Mortgage Loan Interest): the amount charged, expressed in terms of a percentage to a borrower for the use of an asset, in this case, a home and the loan that paid for it. See Daily Interest Rate for a description of its calculation over the life of the loan.

Loan Origination Fees

Fees charged by the lender to process and complete a mortgage or real estate loan process, as payment for making the loan. They are quoted on percentage points and are more commonly 0.5% or 1% of the loan amount.


A fixed- or variable- rate loan to purchase a home. The property is the guarantee of the loan.

Mortgage payment

The monthly amount that a borrower pays on his or her mortgage. The payment is divided into Principal, Interest, Taxes (property) and Insurance (private mortgage insurance or any that apply). Both the taxes and insurance are held on escrow by the lender, and paid when due.

Piggyback loan

A small parallel mortgage in the amount of the down payment, granted in some cases when the borrower does not have a down payment. They are granted so that they borrower will not need Private Mortgage Insurance.

Points (or mortgage discount points)

Discount points to a mortgage loan’s APR that may be purchased by the borrower. The more points you pay, the lower your interest rate.

Principal (Mortgage Loan Principal)

The amount owed to the lender of a mortgage that does not include any accrued interest due or escrow amounts. In other words, the actual loan balance. When a monthly payment is made to a mortgage, part of that payment is paid to the principal so that the balance is reduced with each passing month.

Private Mortgage Insurance (PMI)

An insurance that protects a lender against loss in the case of borrower default. In layman’s terms, this is an insurance policy obtained over some loans in case the person borrowing stops paying. Most lenders require PMI when the borrower offers less than 20% of the value as down payment.

Property tax

The amount of tax imposed on you by the local government for owning property. It is calculated based on the value of the property including the land on which it sits. When there is a mortgage on the property, a part of the monthly payment to that mortgage includes a portion of the property tax amount for that year. It is held in escrow until due, and paid by the lender.

Prorated Property Taxes

Then a property is bought, the seller may have already paid the property taxes for that fiscal year and needs to be reimbursed for the portion of the tax for the period that the buyer will own the property. Or it may be that the buyer will have to pay for the taxes later in the year. The party that has not paid the taxes must pay the other party the prorated tax amount for the period they own the property.

Right of Rescission

A right, established by law, that entitles every borrower of certain mortgage loans to rescind (cancel) the contract within three days of closing, with no questions asked. After the right of rescission has been exercised, the lender has 20 days to revoke its right to the property and refund all fees. This right exists to protect the consumer from unscrupulous lenders, and to give them the right to change their mind within a reasonable period of time.

Second Mortgage, Home Equity Loan, Second Trust

A closed-end loan secured by the equity on a home. This is a loan that has a fixed repayment term set on its contract. Two types of loans are second trusts: second mortgages, and home equity lines of credit.

Title Insurance

A type of insurance that covers in the case of loss of claim over a property and is required for mortgaged properties. Commonly it covers the lender from loss but there may be policies that cover the borrower as well.

Title Search Fee

In the purchase of a property the title search is the process of retrieving the history of ownership of that property to ascertain that there are no pending interests or claims on it, and no legislative or judicial issues that may affect ownership of it.

Truth in lending Disclosure

A federal law that requires a lender to disclose the Annual Percentage Rate to the home borrower shortly after initiating the application procedure for a home loan. It represents the first document in which a rate is disclosed in the form of an APR.

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