Appendix 1: Glossary of Home-Buying
and Money-Management Terms

ACCOUNT STATEMENT — A record of account activity over a specific period of time.

ADJUSTABLE-RATE MORTGAGE (ARM) — A mortgage in which the interest rate is adjusted periodically, based on a preselected index. It is also sometimes known as a renegotiable-rate mortgage or a variable-rate mortgage.

AMI — Area median income.

AMORTIZATION — Loan payment by equal periodic payments calculated to pay off the debt by the end of a fixed period.

AMORTIZATION SCHEDULE — A timetable for mortgage payment showing the amount of each payment applied to interest, the amount applied to principal, and the balance remaining.

ANNUAL PERCENTAGE RATE (APR) — An interest rate reflecting the cost of a mortgage as a yearly rate. This rate takes into account points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost of each loan.

APPRAISAL — An estimate of the value of a property. The estimate is made by a qualified professional known as an appraiser.

APPRECIATION — An increase in the value of a property due to changes in market conditions or other causes.

ASSESSED VALUE — The value placed on a property by a public tax assessor. Assessed values are used to compute property taxes.

ASSETS — Cash or something that can be converted into cash, such as a savings account, stocks, or real estate.

AUTOMATED TELLER MACHINE (ATM) — A machine that provides many of the same services as a financial institution. Many financial institutions own ATMs to provide convenient services to their customers. Various fees are sometimes attached to using an ATM for financial transactions.

AVAILABLE BALANCE — The amount of money immediately available in an account. This amount does not reflect any withdrawals or deposits that have not yet cleared the account.

BALLOON LOAN — A short-term loan with low monthly payments that are not enough to pay off the entire loan amount, so a balloon, or lump-sum payment, is due at the end of the loan term. This type of loan may have a provision to refinance when the balloon payment is due.

BASIS POINT — A finance term meaning a yield of 1/100th of 1 percent annually. (An increase of 25 basis points means a 1/4 of 1 percent increase in an interest rate, for example.)

BOUNCED CHECK — A check that is returned because there is not enough money in the account to cover it.

BROKER — An individual who helps to arrange funding or negotiate contracts for a home buyer. Brokers usually charge a fee or receive a commission for their services.

BUY-DOWN — When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. Payments are initially low but increase when the subsidy expires.

CANCELED CHECK — A check that has been processed and its amount subtracted from the account on which it was written. Canceled checks are often used as proof of payment instead of receipts.

CAPS (INTEREST) — Consumer safeguards that limit how much the interest rate on an adjustable-rate mortgage may change per year and/or over the life of the loan.

CASHIER’S CHECK — A type of check that is as good as cash. When issuing a cashier’s check, the financial institution deducts funds from the consumer’s account and writes the check from its own account. There is usually a fee for a cashier’s check.

CASH RESERVE — A requirement of some lenders that buyers have sufficient cash remaining after closing, equivalent to two months’ mortgage payments.

CHECK REGISTER — A tool for keeping track of the daily balance in a checking account and for keeping a description of every check written.

CLEARS — What happens when the amount of the check written has been withdrawn from the checking account by the financial institution.

CLEAR TITLE — A title that is free of liens and/or legal questions about the property’s ownership.

CLOSING — A meeting between the buyer, the seller, and the lender (or their agents), at which the property and funds legally change hands. This is also called "settlement."

CLOSING COSTS — Costs assessed at settlement; these typically include an origination fee, discount points, an appraisal fee, title search and insurance fees, survey fees, taxes, a deed recording fee, a credit report charge, and other costs. The fees usually total 3 to 6 percent of the mortgage amount.

CO-BORROWERS — Two or more persons who legally agree to take out and be responsible for paying off a loan together.

COLLATERAL — Something of value that the borrower commits to guarantee repayment of a loan.

COMMITMENT LETTER — A formal offer by a lender stating the terms under which a financial institution agrees to lend money. Sometimes called a "loan commitment."

COMMUNITY DEVELOPMENT BLOCK GRANT — An annual formula grant to entitled metropolitan cities, urban counties, and states for the distribution of funds to nontitle communities. Program funds are used for a range of community development activities, including neighborhood revitalization, economic development, and improved community facilities and services.

CONTINGENCY — A condition that must be met before a contract is "legally binding," that is, before a consumer must legally complete what is agreed to in the contract.

CONVENTIONAL LOAN — A mortgage not obtained under a government-insured program, such as a Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) program.

CONVERSION TO FIXED-RATE LOAN — Some adjustable-rate mortgages let a person convert to a fixed-rate mortgage at specified times, typically during the first five years of the loan. Adding this conversion feature often costs more.

COVENANT — A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.

CREDIT — What a financial institution provides a person who borrows funds with the intent to repay them.

CREDIT BUREAU — An organization that keeps records of people’s repayment histories (i.e., credit reports).

CREDIT HISTORY — A list of a person’s debts and regular monthly expenses, including how much is owed and whether payments are made on time.

CREDIT RATING — A rating that indicates how good a credit risk a person is. Credit ratings are based on personal credit history.

CREDIT REPORT — A report documenting the credit history and current credit status of a borrower.

CREDIT SCORE — A process lenders use to evaluate a loan application. A credit-scoring system is based on the lending organization’s historical experience with borrowers.

CUSTOMER AGREEMENT — A document provided by financial institutions that describes the costs and features of the accounts that they offer.

DEBIT — A withdrawal from an account. If a person writes a $25 check, that person’s account will have a debit of $25 when the check clears.

DEBT — Money owed.

DEBT-TO-INCOME RATIO — The relationship between the amount of a person’s total debt and his or her income, expressed as a percentage.

DEED OF TRUST — A document used in many states instead of a mortgage to secure the payment of a note.

DEFAULT — Failure to pay back money. If a person does not make agreed-upon payments, that person defaults on the loan.

DELINQUENCY — Failure to make payments on time. Delinquency can lead to foreclosure.

DEPOSIT — To put money into an account.

DIRECT DEPOSIT — Funds deposited directly into an account. With the account holder’s agreement, payroll earnings, Social Security benefits, retirement earnings, and other checks received on a regular basis may be deposited directly into an account.

DOWN PAYMENT — Money paid to make up the difference between the purchase price and the mortgage amount. Down payments typically are 3, 5, 10, or 20 percent of the sale price for conventional loans, and 0 to 5 percent on Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loans.

ECONOMY — The way a society organizes to meet the physical needs of its people.

ELECTRONIC FUNDS TRANSFER — Money transactions to or from checking and savings accounts that do not require paper (checks or cash) but use computer technology instead. Examples are direct deposit, automated teller machine (ATM), and debit card transactions.

ENDORSE — When a person signs the back of a check that is made out to that person in order to release the funds.

EQUAL CREDIT OPPORTUNITY ACT (ECOA) — A federal law that requires lenders and other creditors to make credit equally available, without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

EQUITY — The difference between a property’s fair market value and the owner’s current indebtedness; also called "the owner’s interest."

ESCROW — A neutral third party who carries out the instructions of both the buyer and the seller to handle all the paperwork of settlement or "closing." Escrow also may refer to an account held by the lender into which the home buyer places money to be used for tax or insurance payments.

EXPENSES — The amount of money spent on a regular basis.

FAIR CREDIT REPORTING ACT (FCRA) — A consumer protection law that regulates the disclosure of consumer credit reports by credit reporting agencies and establishes procedures for correcting mistakes in a person’s credit record.

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) — The FDIC insures accounts at federal government-regulated financial institutions for up to $100,000 per account.

FEDERAL HOUSING ADMINISTRATION (FHA) — A division of the U.S. Department of Housing and Urban Development. Its main activity is to help low-income persons obtain residential home mortgage loans made by private lenders.

FEE — Any charge added to a loan.

FHA 203(k) REHABILITATION MORTGAGE — An FHA-insured first mortgage that enables borrowers to purchase and rehabilitate homes.

FHA LOAN — A home mortgage loan insured by the FHA and open to all qualified home buyers.

FIRST MORTGAGE — A mortgage that has first claim to the secured property in the event of default.

FIXED-RATE MORTGAGE — A mortgage on which the interest rate is set for the term of the loan.

FLOOD INSURANCE — Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

FORBEARANCE — The lender’s postponement of foreclosure to give the borrower time to catch up on overdue payments.

FORECLOSURE — A legal procedure in which the property securing a debt is sold by the lender to pay the defaulting borrower’s debt.

FORGERY — When a person purposefully tries to withdraw money from someone’s account by pretending to be the owner of that account.

GRADUATED PAYMENT MORTGAGE (GPM) — A type of flexible-payment mortgage in which the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

GROSS ANNUAL INCOME — The total yearly income from all sources before taxes are deducted.

GROSS MONTHLY INCOME — The total amount of money earned each month before taxes or any expenses are deducted.

HAZARD INSURANCE — A form of insurance in which the insurance company protects the insured from specified losses resulting from fire, windstorm, and the like.

HOLD — The number of days a financial institution will hold a check before crediting an account.

HOME EQUITY LOAN — A loan based on the equity that a borrower has in his or her home.

HOMEOWNER’S INSURANCE — An insurance policy that combines personal liability coverage and hazard insurance coverage for a home and its contents.

HOMEOWNER’S WARRANTY — A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale.

INITIAL INTEREST RATE — An initial interest rate, or teaser rate, is a low rate that lasts only until the first adjustment. After that, a person will be charged the fully indexed rate.

INSTALLMENT CREDIT — A type of credit that allows a person to borrow a specific amount of money at one time for a defined purpose. A set amount is repaid each month.

INSUFFICIENT FUNDS — A term meaning that the amount of money in a person’s account is less than the amount that person would like to withdraw.

INTEREST — The fee charged for borrowing money.

INTEREST RATE LOCK-IN — When a lender agrees to hold the quoted rate for a consumer.

JOINT TENANCY — A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

LATE CHARGE — The penalty a borrower must pay when a payment is made after the due date.

LIEN — A claim on a property for the payment or satisfaction of a debt or obligation.

LOAN PROCESSING — The steps a lender takes to decide if a buyer can qualify for a loan.

LOAN PROCESSING TIME — Loan approvals can take 30 to 60 days or more.

LOAN-TO-VALUE RATIO — The relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage.

MARKET ECONOMY — An economic system in which goods and services must be purchased from others.

MARKET VALUE — The highest price that a buyer would pay and the lowest price a seller would accept on a property.

MINIMUM BALANCE — The necessary amount of money on deposit to qualify for special services.

MINIMUM PAYMENT — The smallest possible monthly payment.

MONTHLY STATEMENT — An account summary mailed monthly to a customer.

MORTGAGE — A legal document that pledges a property to the lender as security.

MORTGAGE BANKER — A company that originates mortgages exclusively for resale in the secondary market.

MORTGAGE BROKER — An individual or company that acts as an intermediary between borrowers and lenders.

MORTGAGEE — The lender.

MORTGAGE INSURANCE — Money paid to insure the mortgage when the buyer’s down payment is less than 20 percent. See private mortgage insurance.

MORTGAGE NOTE — A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The mortgage note is secured by a mortgage.

MORTGAGOR — The borrower or homeowner.

NATIONAL CREDIT UNION SHARE INSURANCE FUND (NCUSIF) — A fund that insures accounts at federal government-regulated credit unions for up to $100,000 per account.

NET INCOME — Total income after income taxes and other withheld items such as Social Security or Medicare taxes are taken out.

NONINSTALLMENT OR SERVICE CREDIT — A type of credit offered by some businesses and utility companies that allows a person to pay for a used service at a later date.

NONTRADITIONAL CREDIT HISTORY — A credit history that can be prepared if a person does not have credit cards or has never had a loan. It can include receipts and canceled checks from monthly payments for rent, utilities, and other bills.

NOT SUFFICIENT FUNDS (NSF) — A term meaning that the amount of money in a person’s account is less than the amount that person would like to withdraw.

ORIGINATION FEE — The fee charged by a lender to prepare loan documents, make credit checks, inspect a property, and sometimes appraise a property. It usually is computed as a percentage of the face value of the loan.

OVERDRAFT PROTECTION — A line of credit to cover insufficient funds.

OVERDRAWN — When more than the existing balance is withdrawn from an account.

OWNER FINANCING — A transaction in which the seller provides all or part of the financing.

OWNER OCCUPIED — A term describing a property that is used as the owner’s primary residence.

PAYMENT CAPS — Payment caps are not the same as rate caps. They can limit how much a person’s monthly payment increases, but they do not prevent the interest rate from going up. Many adjustable-rate mortgages with payment caps have no corresponding interest rate caps. As a result, a consumer many end up paying the lender less than the amount of interest owed each month. If this happens, this unpaid interest is added to the loan balance, and the principal amount owed increases rather than decreases with each payment.

PAYMENT FACTOR TABLE — A table that can be used to calculate monthly payments and the cost of credit for installment loans.

PITI — Principal, interest, taxes, and insurance. This also is called monthly housing expense.

POINTS (LOAN DISCOUNT POINTS) — Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

PREDATORY LENDER — A lender that directs a borrower away from loans with more affordable interest rates and instead offers the applicant a loan with a high interest rate, questionable fees, or unnecessary charges.

PREPAYMENT — A privilege in a mortgage permitting the borrower to make payments before their due date.

PREQUALIFICATION — The process of determining how much money a prospective home buyer will be eligible to borrow before he or she applies for a loan.

PRINCIPAL — The amount of debt, not counting interest, left on a loan.

PRIVATE MORTGAGE INSURANCE (PMI) — Insurance against a loss by a lender in the event of default by a borrower (mortgagor). It generally is required when the home buyer makes a down payment of less than 20 percent of the purchase price. The initial premium payment is usually 1 to 5 percent of the mortgage amount and may require an additional monthly fee, depending on the loan structure. (For example, for a $75,000 house with a 10 percent down payment, PMI payments would be either an initial premium payment of $2,025 to $3,375 or an initial premium of $675 to $1,130 plus monthly payments of $25 to $30.)

PURCHASE AND SALE AGREEMENT — A written contract that the buyer and seller sign. It includes all of the terms and conditions of the sale.

QUALIFY — To determine how much money a consumer is able to borrow.

RADON — An invisible, odorless gas found in some homes that, in sufficient concentrations, may cause health problems.

RECORDING FEES — Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

REFINANCING — The process of paying off one loan with the proceeds from a new loan, using the same property as security.

RESPA — The Real Estate Settlement Procedures Act, a federal law that allows consumers to review information on known or estimated settlement costs, once after application and once before or at settlement.

REVOLVING CREDIT — A type of credit that allows a person to borrow money at any time up to a set limit. As the borrowed money is paid back, it becomes available again to borrow. For instance, credit cards operate on revolving credit.

SECOND MORTGAGE — A mortgage that has a lien position subordinate to the first mortgage.

SECTION 502 RURAL HOUSING LOANS — Direct loans to lower income rural families to buy, build, improve, or rehabilitate decent, safe, and sanitary housing and related facilities for use as the families’ permanent residences.

SECTION 504 RURAL HOUSING LOANS AND GRANTS — Direct loans and project grants to help very low income people in rural areas to repair or improve their homes.

SECTION 509 GRANTS — Grants to package single-family housing applications for very low and low-income rural residents in designated counties who wish to buy, build, or repair houses for their own use and to those wishing to develop rental units for lower income families.

SECURED CREDIT — A type of credit requiring that a consumer provide something of value to guarantee repayment of a loan.

SECURED CREDIT CARD — A type of credit card requiring that a person deposit a certain amount of cash in a savings account to guarantee the credit card.

SERVICE CHARGE — A fee that financial institutions sometimes charge for specific services. The service charge will vary depending on the type of account. Consumers should ask about service charges and fees before selecting a financial institution or a type of account.

SETTLEMENT STATEMENT — The computation of costs payable at closing that determines the seller’s net proceeds and the buyer’s net payment.

STOP PAYMENT — An order by a customer to a financial institution not to release issued funds (i.e., not to cash a check).

SUBSISTENCE ECONOMY — An economic system in which people provide for their own needs (e.g., through agriculture and hunting).

TERMS — The conditions of a loan, including the type, size of down payment, amount that can be borrowed, interest rate, and length of time to repay.

TITLE — A legal document that is evidence of a person’s right to or ownership of a property.

TITLE COMPANY — A company that specializes in examining and insuring titles to real estate.

TITLE INSURANCE — A policy, usually issued by a title insurance company, that insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property and often is borne by the purchaser and/or seller.

TITLE SEARCH — An examination of municipal records to determine the legal ownership of a property. It usually is performed by a title company.

TRUTH-IN-LENDING — A federal law (part of the Consumer Credit Protection Act) that requires lenders to disclose a loan’s annual percentage rate to home buyers shortly after they apply for the loan.

UNSECURED CREDIT — A type of credit that does not require collateral (something of value to guarantee repayment of a loan).