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House buying 101 -- simple house-buying terms defined

Escrow? Jumbo loan? PMI? Before your head is swimming with these house-buying terms, get a quick vocabulary lesson in some real estate and mortgage terms. This list consists of just a few of the real estate and mortgage terms you may encounter in the process of buying a home. For a fuller list of terms, see Bankrate's definitions page.

Amortization
A method of paying off the mortgage which pays part of the principal along with interest, rather than just paying off the interest first.

Appraisal
A written report by a qualified appraiser estimating the value of a property.

Assessed value
The dollar value of an asset assigned by a public tax assessor for the purposes of taxation.

Binder
An offer to purchase or earnest money receipt, acknowledging a deposit along with agreement to enter into a contract for the sale of real estate.

Cash reserves
The money the buyer has left over after the down payment and all those closing costs.

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Concrete block and stucco.

CC&Rs
Covenants, conditions and restrictions, which control the use of the property.

Closing
The meeting at which the sale of a property is finalized. The buyer signs the lender agreement for the mortgage and pays closing costs and escrow amounts. The buyer and seller sign documents to transfer ownership of the property. Also known as the settlement.

Coach home
One of a group of homes in a two-story building, with own garage and entrance.

Contingency
A condition that must be satisfied before a contract is binding. Inspection and obtaining financing are the two most common.

Courtyard home
A home with a courtyard as its main entrance.

Debt ratios
Also called debt-to-income ratio. It is the percentage of a person's monthly earnings used to pay off debt obligations. Lenders consider two ratios, constructed in slightly different ways. The first, called the front-end ratio, is the ratio of the monthly housing expenses -- including principal, interest, property taxes and insurance (PITI) is compared to the borrower's gross pretax monthly income. In the back-end ratio, a borrower's other debts, such as auto loans and credit cards, are also figured in. Lenders usually take both into account and set an acceptable ratio, which might be expressed as 33/39. Some lenders, and some lending qualifying agencies such as FHA, take only the back-end ratio into account.

Equity
The value of a homeowner's unencumbered interest in real estate. Equity is the difference between the home's fair market value and the unpaid balance of the mortgage and any outstanding liens. Equity increases as the mortgage is paid down or as the property appreciates.

Earnest money
A deposit made by potential home buyers during negotiations with the seller. The sum shows a seller that a buyer is serious about purchasing the property. The money usually is counted toward the down payment.

Escrow account
Most lenders set up this account that receives monthly payments from home buyers to pay for obligations such as insurance, taxes and assessments.

HOA
Homeowners association.

Home warranty
Like any other warranty, this guarantees the property against failure of mechanical systems, such as plumbing, electrical, heating and installed appliances.

Jumbo loan
A loan that exceeds the amount acceptable for sale in secondary market.

Lanai
A roofed patio.

Leverage
The use of financing to buy a large investment, such as a house, with a small amount of money.

Lien
A legal claim on the property as security for a debt or charge.

Lock
Fixing of an interest rate or points at a certain level.

Mortgage broker
An independent individual (or company) who brings together borrowers and lenders together. Unlike a mortgage banker, a mortgage broker does not fund the loan. Instead, the broker originates and processes the loan, and places it with a funding source, such as a bank or thrift. Brokers typically require a fee or a commission for their services.

Origination fee
A fee paid to a lender for processing a loan application, usually computed as a percentage of face value of the loan.

Patio home
Small, single-family home with a patio.

PITI
Principal, interest, taxes, insurance -- the things that generally make up a monthly mortgage payment.

Point
A point equals 1 percent of a mortgage loan. Lenders charge points as a way to make a profit.

Private Mortgage Insurance (PMI)
Insurance that protects mortgage lenders against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in monthly installments. PMI should be terminated when the home buyer has built up 20 percent equity in the property.

Recording fee
A charge from the city or county for recording the transfer of the property.

Single-family home
A detached house.

Title insurance
Insurance that protects against loss from disputes over ownership of a property. A policy may protect the mortgage lender, the home buyer, or both.

Townhouse
One of a row of houses connected with common side walls.

Tray ceiling
A flat ceiling with a raised center portion.

Vaulted ceiling
An arched ceiling.

Veranda
Long covered porch.

Villa
Smaller home on a small lot, may share side wall with another home.

-- Posted: March 15, 2004
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