GLOSSARY OF TERMS Copyright 1996 Brad Evans

ACCELERATION - The right of the lender (mortgagee) to demand immediate repayment of the mortgage loan balance upon default of the borrower (mortgagor). Default can consist of many things. Due on sale clause may cause the bene to call the note if the property was sold without the bene's approval. (Few title co's will handle a default for you however when based on acceleration alone.

"What The Heck Is Hard Money"

ADJUSTABLE RATE MORTGAGE (ARM) - The payment and the interest rate may go up or down according to some index that they are tied to, on this type of mortgage loan.

ALTERNATIVE FINANCING - Mortgage financing other than a 30 year fixed rate mortgage, usually provided by an institutional lender.

AMORTIZATION - Liquidating or reducing the principal on a mortgage loan by making mortgage payments over a specific period of time.

ANNUAL PERCENTAGE RATE (APR) - The cost of credit in relation to the amount financed. The lender is required to state the APR on loan documents.

APPRAISAL - An estimate of value on a piece of real estate by an appraiser who is considered to be an expert in real estate property valuations. The appraisal usually determines how much money the lender will loan on that property.

ASSUMPTION - The act of taking over a mortgage obligation incurred by the original borrower. The new owner assumes the mortgage obligations and assumes title to the property.

BALLOON PAYMENT - A mortgage obligation which has a balance due and payable at the end of the mortgage term which is greater than one installment payment. The final balloon payment wipes out the amount owed.

BASIS POINT - Lenders use basis points to measure interest rates in yield calculations. One basis point equals 1/100th of 1% in interest. 100 basis points equals 1% interest.

BLANKET MORTGAGE - A mortgage which may use two or more pieces of real estate for security on a single loan.

"What The Heck Is Hard Money"

BORROWER (MORTGAGOR) - One who applies for and receives a loan in the form of a mortgage. More than one applicant is referred to as co borrowers.

BUYDOWN - Is an artificial subsidy paid by someone (seller, builder, relative, purchaser, etc.) to provide a lower interest rate for the borrower.

BRIDGE LOAN - A temporary mortgage loan to help a borrower obtain the necessary cash funds to purchase another home, prior to the sale of their currently owned home.

CASH FLOW - The amount of cash derived over a certain period of time from an income producing property, such as a rental house. Theoretically the cash flow should be large enough to pay all property expenses including mortgage payments, maintenance, taxes, etc.

CERTIFICATE OF ELIGIBILITY - The document given to qualified veterans which entitles them to VA guaranteed loans for homes and businesses. Certificates may be obtained by sending the veteran's separation papers (DD-214) to the local VA office with a request form (VA 1880) completed by the veteran.

CERTIFICATE OF REASONABLE VALUE (CRV) - A document issued by the Veterans Administration which acts as an appraisal, showing the property's current value.

CERTIFICATE OF VETERAN STATUS - The document given to veterans or reservists who have served a minimum of 90 days of continuous active duty (including training time). This form may be obtained by sending form DD-214 (separation papers) to a local VA office with a request form (VA 26-8261/a). This document allows reservists or veterans to obtain lower downpayment FHA loans.

CLOSING - The act of concluding the sale of real estate by exchange of a deed in return for other considerations. (The signing of legal documents necessary to convey the property.)

COMMERCIAL BANKS - Local state and national banks which provide the primary source for construction financing. Many also loan money for permanent mortgages on housing.

COMMITMENT - A promise by a lender to make a loan with specific terms or conditions to a borrower or homebuilder. Also a promise by an investor to purchase mortgages from a lender with specific terms or conditions.

COMMITMENT FEE - An upfront charge paid to bind an agreement to lend an amount of money at a specific interest rate.


"What The Heck Is Hard Money"

(INTERIM LOAN) - A temporary loan to provide funds necessary to begin construction on buildings or homes.

CONTRACT FOR SALE OR DEED - A written contract to purchase between a buyer and seller of real estate. Once the conditions of the contract have been fulfilled, the seller will convey title of the property to the purchaser.

CONVENTIONAL LOAN - A mortgage loan made by an institutional lender without government guarantees such as VA or FHA loans.

CONVERSION OPTION - The right for the borrower for a fee, to convert an adjustable rate mortgage into a fixed rate mortgage within a specific period of time.
CREATIVE FINANCING - When institutional financing such as traditional loans or alternative financing does not solve the home purchasing problem, another party such as the seller or an investor may provide non institutional financing. This non-institutional financing may be very"creative" as the seller does not have to follow the same stringent lending rules institutional lenders must follow.

"What The Heck Is Hard Money" CURRENT INDEX - The current value of a recognized index as calculated and published nationally or regionally. The current index changes periodically and is used in calculating the new note rate at each adjustment period.

DEED OF TRUST - A security instrument used to transfer property to a trustee. Some states use a deed of trust while other use a mortgage as security for a mortgage loan.

DEFERRED INTEREST MORTGAGE - A mortgage in which the payment is not sufficient to pay the principal and the interest. The interest is deferred and will be paid at a later date.

DEFAULT - The failure of a duty or obligation, such as the failure to make the required payments called for in a mortgage note. Loan default may cause foreclosure.

DISCOUNT BUYDOWN - The paying of discount points to reduce the interest rate temporarily or permanently for a home purchaser.

DISCOUNT POINTS - A device used to equalize interest rate yields for lenders and investors. Each discount point is equal to one percent of the loan amount. Each discount point paid on a 30 year fixed rate mortgage increases the lenders yield by approximately one-fifth of a percent in interest.

DISINTERMEDIATION - That condition that occurs when funds are leaving savings institutions at a faster rate than funds are coming in.
ENTITLEMENT - The VA home loan benefit given to qualified veterans which is used to guarantee a VA home or business loan.

EQUITY - The value a property owner has in real estate once the obligations and costs of selling are deducted.

EQUITY PARTICIPATION - An investor or lender may offer lower interest rates to a borrower in return for sharing in the appreciation or expected equity gain. This concept is very common in commercial real estate.

EQUITY SHARING - Any two or more purchasers that wish to purchase real estate together can divide the property's appreciation or equity. A lender or investor can offer a lower interest rate in return for a share of anticipated equity.

ESCROW ACCOUNT - Funds which are set aside and held in trust by a third party, usually to pay taxes and insurance on real estate.

FHA - Federal Housing Administration, a department of Housing and Urban Development which insures FHA mortgage loans.

FHLMC - Federal Home Loan Mortgage Corporation (Freddie Mac) is a quasi government body to provide a secondary mortgage market so that an adequate supply of mortgage money is available for home purchases.

FIRM COMMITMENT - A promise from a lender to make a mortgage loan with specific terms. A promise by FHA to insure a mortgage for a specific property and purchaser.

FIXED RATE MORTGAGE (FRM) - A mortgage loan which would have a fixed interest rate and a fixed payment for the entire term of the loan for the original borrower.

FMHA - Farmers Home Administration is a federal government agency which guarantees loans on farms and businesses in rural areas of the United States.

FNMA - Federal National Mortgage Association (Fannie Mae) is a quasi government body to provide a secondary mortgage market, so that an adequate supply of mortgage money is available for home purchases.

FORECLOSURE - A legal process by which the lender or seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage.

FULLY INDEXED NOTE RATE - The index plus the lenders gross profit margin. If the index is 10% and the lenders profit margin is 2%, the fully indexed note rate would be 12%.

GNMA - Government National Mortgage Association (Ginnie Mae), an agency of HUD designed to attract capital into the mortgage markets and provide a secondary mortgage market for the sale of VA and FHA mortgages.

GRADUATED PAYMENT MORTGAGE (GPM) - A mortgage that usually starts the borrower with low payments which are gradually increased over 5-10 years, until the loan is fully amortized. Negative amortization usually occurs until the payment reaches the level payment stage. Usually government insured loans (VA or FHA).

GRADUATED PAYMENT ADJUSTABLE RATE MORTGAGE (GPARM) - A conventional mortgage that would start the borrower out with low payments which are gradually increased over 3-6 years, until the loan is fully amortized. Negative amortization usually occurs until the payment reaches the level payment stage.

GROSS MARGIN (PROFIT MARGIN) - This is the lenders profit margin on adjustable rate mortgages. This profit margin is usually in the 2%-3% range and when added to the index rate equals the full note rate. If the gross margin is 2% and the index rate is 10%, the note rate would be 12%

GROWING EQUITY MORTGAGE (GEM) - This is a long term mortgage whereby the borrower agrees to increase his payment each year by an agree amount. The extra payments are applied to the loan principal, which in turn would pay off the mortgage in 12-16 years.

HAZARD INSURANCE - Also called homeowners insurance, it is insurance to cover losses due to fire, wind, vandalism, theft, etc.

INDEX - The measuring device used to determine if interest rates have gone up or down over time. A wide variety of indexes may be used with adjustable rate mortgages.

INITIAL NOTE RATE - The mortgage note rate at the inception of the mortgage. This rate will change periodically according to the index.

INTEREST CAP - A consumer protection which limits the amount of interest that a loan may be increased or decreased. Yearly interest caps and life of loan caps are available with many loans today.

INTEREST RATE BUYDOWN - The payment of money to a lender to reduce the borrower's interest rate either temporarily or permanently. This would help reduce the buyer's payments and help him qualify for the loan.

INTERIM FINANCING - A temporary construction loan made during the completion of a home or building, which is usually replaced by a permanent loan after completion and/or sale of the property.

LIEN - A charge against a property similar to a mortgage. A security instrument for repayment of a debt owed.

LIFE OF LOAN CAP - A cap which covers the entire life or term of the loan. A typical life of the loan in use today, would be a 5% interest rate cap.

LOAN TO VALUE RATIO - The relationship between the mortgage loan and the appraised value of the property, expressed as a percentage. A 90% conventional loan has a 90% loan to value ratio.

MARKET VALUE - The value of a property determined by comparable sales, or the actual sale price.

MECHANICS LIEN - A lien placed on a property as security for payment for work performed in the construction of the property.

MORTGAGE INSURANCE PREMIUM (M.I.P.) - Mortgage insurance premium is required on FHA loan. M.I.P. is paid by the borrower and insures that lenders making FHA loans will be covered against foreclosure losses.

MORTGAGE BANKERS - Individual lenders who make mortgage loans from borrowed funds and then sell the loans to investors, usually mortgage companies as opposed to savings and loans or banks. The traditional VA FHA lenders.

MORTGAGEE (LENDER) - The lender of money for the purchase of real estate. One who holds a mortgage on real estate.

MORTGAGOR - The borrower of money to purchase real estate.

MORTGAGE INFORMATION LETTER (MIL) - A letter issued by the lender which indicates the payoff balance of a loan as well as any other requirements of loan payoff.
NEGATIVE AMORTIZATION - The opposite of amortization, the loan balance goes up instead of down, until the payments reach a fully amortizing level. Also referred to as deferred interest.

NEGATIVE CASH FLOW - When the rental income on investment property does not cover the mortgage payments, taxes, insurance, maintenance and other costs of the investment.

NOTE - The signed obligation to repay a debt, as a mortgage note.

NOTE RATE - The interest rate that must be paid back on the mortgage note in addition to the principal amount owed.

ORIGINATION FEE - The fee charged by a lender for processing a loan application. It usually amounts to 1% of the loan applied for.

OVERALL INTEREST CAP - Same as life of the loan cap. A stated amount limiting increases or decreases in interest over the life of the loan.

PAYMENT ADJUSTMENT PERIOD - This is the time frame between payment adjustments made on adjustable rate mortgages. Usually 1, 3 or 5 years.

PAYMENT CAP - A cap placed on the borrower's payment rather than his interest rate. A typical payment cap used today would be 7 1/2% of the payment. (Roughly equivalent to 1% in interest.)

PAYMENT RATE - The effective rate of interest the buyer is paying at a certain time, regardless of the overall interest rate of the note.

PERMANENT BUYDOWN - An amount of money paid to a lender to permanently reduce a borrower's interest rate and payments.

PERMANENT LOAN - A long term mortgage of 10 years or more. Also called an "end loan."

PLEDGED ACCOUNT BUYDOWN - A buydown that uses a principal amount paid plus interest earned on the principal to reduce a borrower's interest rate and payment.

POINTS - A charge equal to 1% of the loan amount which increases or equalizes the lenders yield or rate of return. Each discount point is worth roughly one-fifth of a percent in interest on a 30 year fixed loan.

PREPAYMENT PRIVILEGE - The right of a borrower to pay off a loan before the maturity date, without incurring a penalty.

PRIMARY MORTGAGE MARKET - Lenders who make mortgage loans directly to borrowers. Examples are savings and loans, commercial banks and mortgage companies. These lenders may sell their loans to the secondary mortgage market such as FNMA, FHLMC and GNMA.

PRINCIPAL - The amount of the mortgage debt which is presently owed.

PRIVATE MORTGAGE INSURANCE - Similar to FHA's mortgage insurance premium but it is provided by private insurance companies to lenders making conventional loans with less than 20% down. It protects lenders against foreclosure losses.

PROCEEDS BUYDOWN - A buydown which the seller or builder pays from his proceeds to give a buyer a lower interest rate and payment.

QUIT CLAIM DEED - The deeding or giving up one's interest in a property to another party.

RAPID PAYOFF MORTGAGE (RPM) - A fancy name for a short term mortgage. Usually a 15 year fully amortized mortgage.

REFINANCE - Obtaining a new mortgage loan on property already owned, often to replace existing loans on the property.

RENEGOTIABLE RATE MORTGAGE (RRM) - Similar to an adjustable rate mortgage when the interest rate and payments can be adjusted periodically to an index.

REVERSE ANNUITY MORTGAGE (RAM) - A mortgage where the properties equity is used to give the homeowner a monthly income.

ROLLOVER MORTGAGE (ROM) - A mortgage where the payments are only guaranteed for 3, 4 or 5 years. The payments would be renewed for successive terms according to prevailing interest rates.

SATISFACTION OF MORTGAGE - Also called a "release of mortgage," a document issued by the lender when the mortgage is paid in full.

SAVINGS AND LOANS - The traditional lenders for conventional home loans.

SECOND MORTGAGE - A mortgage which is recorded after a first mortgage is already recorded. The second mortgage is subordinate to the first mortgage.

SECONDARY MORTGAGE MARKET - A place that the primary lenders can sell their mortgages to obtain more funds to make additional loans. The secondary market consists of FHLMC, FNMA, GNMA and several private firms such as GECC and Sears Financial.
SHARED APPRECIATION MORTGAGE (SAM) - Similar to shared equity mortgages. Two or more parties participate in the purchase of real estate and share the appreciation and tax deduction.

SWEAT EQUITY - When a purchaser performs work or services on the property he intends to purchase, equity may be earned by the purchaser.

TITLE INSURANCE - Insurance issued to owner of real estate to protect them against claims arising by reason of defects in the title to the property.

USURY - Interest charged in excess of the legal rate established by law.

VA LOANS - A mortgage loan made to a qualified veteran and guaranteed by the Veterans Administration. The "loan guarantee" is to the private lender making the loan, to protect them against foreclosure losses.

WAREHOUSE FEE - Many mortgage firms borrow funds on a short term basis in order to originate loans which will later be sold in the secondary mortgage market. When the rate of interest is higher on short term loans than on long term mortgage loans, the lender has an economic loss. This loss is offset by changing a warehouse fee.

WRAPAROUND MORTGAGE - A new larger mortgage is created which would encompass the first mortgage. This large second mortgage is used to preserve the low interest rate on the first mortgage for a potential buyer.

YIELD - A return on an investment, which includes the interest rate charged, discount points paid and any other charges collected.
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"What The Heck Is Hard Money"