Acceleration
Clause
A provision in a
mortgage that gives the lender the right to demand
payment of the entire principal balance if a
monthly payment is missed.
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Acceptance
An offeree's
consent to enter into a contract and be bound by
the terms of the offer.
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Adjustable-rate
Mortgage (ARM)
A mortgage that
permits the lender to adjust its interest rate
periodically on the basis of changes in a
specified index
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Adjustment
Date
The date on which
the interest rate changes for an adjustable-rate
mortgage
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Adjustment
Period
The period that
elapses between the adjustment dates for an
adjustable-rate mortgage.
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Amortization
Number of fixed
payments or years it takes to repay the entire
amount of the mortgage loan.
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Amortization
Schedule
A timetable for
payment of a mortgage loan. An amortization
schedule shows the amount of each payment applied
to interest and principal and shows the remaining
balance after each payment is made.
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Appraisal
A written analysis
of the estimated value of a property prepared by a
qualified appraiser.
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Appraised
Value
An opinion of a
property's fair market value, based on an
appraiser's knowledge, experience, and analysis of
the property.
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Appreciation
An increase in the
value of a property due to changes in market
conditions or other causes. The opposite of
depreciation.
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Assessed
Value
The valuation
placed on property by a public tax assessor for
purposes of taxation.
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Asset
Anything of
monetary value that is owned by a person. Assets
include real property, personal property, and
enforceable claims against others (including bank
accounts, stocks, mutual funds, and so on).
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Assignment
The transfer of a
mortgage from one person to another.
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Assumable
Mortgage
A mortgage that
can be taken over ("assumed") by the
buyer when a home is sold.
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Assumption
Agreement
A legal document
signed by a home buyer which requires the buyer to
assume responsibility for the obligations of a
mortgage made by a former owner.
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Bi-weekly
Accelerated Payments
Payments are
exactly half of a monthly payment amount,
collected every two weeks, on the same day of the
week. More aggressive than semi-monthly.
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Bi-weekly
Payments
A mortgage that
requires payments to reduce the debt every two
weeks (instead of the standard monthly payment
schedule). The 26 (or possibly 27) biweekly
payments are each equal to one-half of the monthly
payment that would be required if the loan were a
standard 25-year fixed-rate mortgage. The result
for the borrower is a substantial savings in
interest.
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Blended
Payments
Equal payments
consisting of both a principal and an interest
component, paid each month during the term of the
mortgage. The principal portion increases each
month, while the interest portion decreases, but
the total monthly payment does not change.
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Building
Code
Local regulations
that control design, construction, and materials
used in construction. Building codes are based on
safety and health standards.
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Cap
A provision of an
adjustable-rate mortgage that limits how much the
interest rate or mortgage payments may increase or
decrease.
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Capital
Expenditure
The cost of an
improvement made to extend the useful life of a
property or to add to its value.
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Capital
Improvement
Any structure or
component erected as a permanent improvement to
real property that adds to its value and useful
life.
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Certificate
of Title
A statement
provided by an abstract company, title company, or
attorney stating that the title to real estate is
legally held by the current owner.
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Chattel
Another name for
personal property.
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Closed
Mortgage
A mortgage which
cannot be prepaid, renegotiated or refinanced.
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Closing
A meeting at which
a sale of a property is finalized by the buyer
signing the mortgage documents and paying closing
costs. Also called "settlement."
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Closing
Costs
Expenses (over and
above the price of the property) incurred by
buyers and sellers in transferring ownership of a
property. Closing costs normally include an
origination fee, an attorney's fee, taxes, an
amount placed in escrow, and charges for obtaining
title insurance and a survey. Closing costs
percentage will vary according to the area of the
country; lenders or realtors often provide
estimates of closing costs to prospective
homebuyers.
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Commission
The fee charged by
a broker or agent for negotiating a real estate or
loan transaction. A commission is generally a
percentage of the price of the property or loan.
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Compound
Interest
Interest paid on
the original principal balance and on the accrued
and unpaid interest.
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Conditional
Offer
An offer to buy a
property if certain conditions are met.
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Condominium
A real estate
project in which each unit owner has title to a
unit in a building, an undivided interest in the
common areas of the project, and sometimes the
exclusive use of certain limited common areas
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Contingency
A condition that
must be met before a contract is legally binding.
For example, home purchasers often include a
contingency that specifies that the contract is
not binding until the purchaser obtains a
satisfactory home inspection report from a
qualified home inspector.
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Conventional
Mortgage
A mortgage loan
which does not exceed 75% of the appraised value
or purchase price of the property, whichever is
the lesser of the two. Mortgages that exceed this
limit must be insured.
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Convertible
mortgage
A provision in
some adjustable-rate mortgages (ARMs) that allows
the borrower to change the ARM to a fixed-rate
mortgage at specified timeframes after loan
origination.
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Debt-service
Ratio
The percentage of
the borrower's gross income that will be used for
monthly payments of principal, interest, taxes,
space heating costs and condominium fees.
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Default
Non-payment of the
installments due under the terms of the mortgage(s).
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Depreciation
A decline in the
value of property; the opposite of appreciation.
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Discharge
The removal of all
mortgages and financial encumbrances on a
property.
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Down
Payment
The part of the
purchase price of a property that the buyer pays
in cash and does not finance with a mortgage.
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Easement
A right of way
giving persons other than the owner access to or
over a property.
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Effective
Interest Rate
The real rate of
interest after the effects of compounding are
included. More frequent compounding adds up to a
higher effective rate.
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Encroachment
An improvement
that intrudes illegally on another's property.
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Encumbrance
Anything that
affects or limits the free simple title to a
property, such as mortgages, leases, easements, or
restrictions.
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Equity
A homeowner's
financial interest in a property. Equity is the
difference between the fair market value of the
property and the amount still owed on its
mortgage.
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Escrow
An item of value,
money, or documents deposited with a third party
to be delivered upon the fulfillment of a
condition. For example, the deposit by a borrower
with the lender of funds to pay taxes and
insurance premiums when they become due, or the
deposit of funds or documents with an attorney or
escrow agent to be disbursed upon the closing of a
sale of real estate.
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Examination
of Title
The report on the
title of a property from the public records or an
abstract of the title.
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Exclusive
Listing
A written contract
that gives a licensed real estate agent the
exclusive right to sell a property for a specified
time, but reserving the owner's right to sell the
property alone without the payment of a
commission.
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Fair
Market Value
The highest price
that a buyer, willing but not compelled to buy,
would pay, and the lowest a seller, willing but
not compelled to sell, would accept.
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Firm
Commitment
A lender's
agreement to make a loan to a specific borrower on
a specific property.
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First
Mortgage
A mortgage that is
the primary lien against a property.
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Fixed
Installment
The monthly
payment due on a mortgage loan. The fixed
installment includes payment of both principal and
interest.
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Fixed-rate
Mortgage (FRM)
A mortgage in
which the interest rate does not change during the
entire term of the loan.
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Fixture
Personal property
that becomes real property when attached in a
permanent manner to real estate.
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Flood
Insurance
Insurance that
compensates for physical property damage resulting
from flooding. It is required for properties
located in federally designated flood areas.
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Foreclosure
The legal process
by which a borrower in default under a mortgage is
deprived of his or her interest in the mortgaged
property. This usually involves a forced sale of
the property at public auction with the proceeds
of the sale being applied to the mortgage debt
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Gross
Debt Service Ratio
The percentage of
gross annual income required to cover payments
associated with housing (mortgage principal and
interest, taxes and secondary financing). Most
lenders prefer that the GDS be no more than 32%.
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High
Ratio Mortgage
If you don't have
the 25% required for a down payment, as is the
case with a conventional mortgage, your mortgage
must be insured against payment default to a
certain maximum by CMHC or an approved private
insurer. A high-ratio mortgage is a loan in excess
of 75% of the lending value of the property.
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Home
Equity Line of Credit
A mortgage loan,
which is usually in a subordinate position, that
allows the borrower to obtain multiple advances of
the loan proceeds at his or her own discretion, up
to an amount that represents a specified
percentage of the borrower's equity in a property.
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Home
Inspection
A thorough
inspection that evaluates the structural and
mechanical condition of a property. A satisfactory
home inspection is often included as a contingency
by the purchaser. Contrast with appraisal.
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Income
Property
Real estate
developed or improved to produce income.
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Initial
Interest Rate
The original
interest rate of the mortgage at the time of
closing. This rate changes for an adjustable-rate
mortgage (ARM). Sometimes known as "start
rate" or "teaser."
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Installment
The regular
periodic payment that a borrower agrees to make to
a lender.
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Joint
Tenancy
A form of
co-ownership that gives each tenant equal interest
and equal rights in the property, including the
right of survivorship.
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Lease
A written
agreement between the property owner and a tenant
that stipulates the conditions under which the
tenant may possess the real estate for a specified
period of time and rent.
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Lien
A legal claim
against a property that must be paid off when the
property is sold.
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Line
of Credit
An agreement by a
commercial bank or other financial institution to
extend credit up to a certain amount for a certain
time to a specified borrower.
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Lock-in
A written
agreement in which the lender guarantees a
specified interest rate if a mortgage goes to
closing within a set period of time. The lock-in
also usually specifies the number of points to be
paid at closing.
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Lock-in
Period
The time period
during which the lender has guaranteed an interest
rate to a borrower.
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Margin
For an
adjustable-rate mortgage (ARM), the amount that is
added to the index to establish the interest rate
on each adjustment date, subject to any
limitations on the interest rate change.
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Maturity
The date on which
the principal balance of a loan, bond, or other
financial instrument becomes due and payable.
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Mortgage
Insurance Premium
A premium which is
added to the mortgage and paid by the borrower
over the life of the mortgage. The mortgage
insurance insures the lender against loss in case
of default by the borrower.
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Mortgage
Life Insurance
A form of reducing
term insurance recommended for the borrower. In
the event of the death of the owner or one of the
owners, the insurance pays the balance owing on
the mortgage. The intent is to protect survivors
from losing their home.
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Mortgage
Loan Insurance
For high-ratio
mortgages, lenders require mortgage loan
insurance. The insurance premium will generally
cost between 0.5% and 3.75% of the amount of the
mortgage (additional charges may apply).
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Mortgagee
The lender.
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Mortgagor
The borrower.
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Negative
Amortization
A gradual increase
in mortgage debt that occurs when the monthly
payment is not large enough to cover the entire
principal and interest due. The amount of the
shortfall is added to the remaining balance to
create "negative" amortization.
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Notice
of Default
A formal written
notice to a borrower that a default has occurred
and that legal action may be taken.
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Open
Mortgage
A mortgage which
can be prepaid at any time, without penalty.
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Original
Principal Balance
The total amount
of principal owed on a mortgage before any
payments are made.
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Origination
Fee
A fee paid to a
lender for processing a loan application. The
origination fee is stated in the form of points.
One point is 1 percent of the mortgage amount.
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Owner
Financing
A property
purchase transaction in which the property seller
provides all or part of the financing.
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P.I.
(Principal & Interest)
Principal and
interest due on a mortgage.
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P.l.T.
(Principal, Interest, & Taxes)
Principal,
interest and taxes due on a mortgage.
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Payment
Change Date
The date when a
new monthly payment amount takes effect on an
adjustable-rate mortgage (ARM). Generally, the
payment change date occurs in the month
immediately after the adjustment date.
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Penalty
A sum of money
paid to a lender for the privilege of prepaying a
mortgage in part or in full.
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Pre-approved
Mortgage
Preliminary
approval by the lender of the borrower's
application for a mortgage to a certain maximum
amount and rate.
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Pre-qualification
The process of
determining how much money a prospective home
buyer will be eligible to borrow before he or she
applies for a loan.
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Prepayment
Any amount paid to
reduce the principal balance of a loan before the
due date. Payment in full on a mortgage that may
result from a sale of the property, the owner's
decision to pay off the loan in full, or a
foreclosure. In each case, prepayment means
payment occurs before the loan has been fully
amortized.
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Prepayment
Option
The right to
prepay specified amounts of the principal balance.
Penalty interest may be incurred on prepayment
options.
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Prepayment
Penalty
A fee that may be
charged to a borrower who pays off a loan before
it is due.
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Prime
Rate
The interest rate
that banks charge to their preferred customers.
Changes in the prime rate influence changes in
other rates, including mortgage interest rates.
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Principal
The amount you
still owe the lender at any time.
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Purchase
and Sale Agreement
A written contract
signed by the buyer and seller stating the terms
and conditions under which a property will be sold
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Qualifying
Ratios
Calculations that
are used in determining whether a borrower can
qualify for a mortgage. They consist of two
separate calculations: a housing expense as a
percent of income ratio and total debt obligations
as a percent of income ratio. See Gross Debt
Service Ratio.
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Quitclaim
Deed
A deed that
transfers without warranty whatever interest or
title a grantor may have at the time the
conveyance is made
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Rate
(interest)
The return the
lender receives for loaning you the money for the
mortgage.
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Recission
The cancellation
or annulment of a transaction or contract by the
operation of a law or by mutual consent. Borrowers
usually have the option to cancel a refinance
transaction within three business days after it
has closed.
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Refinance
Transaction
The process of
paying off one loan with the proceeds from a new
loan using the same property as security.
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Right
of First Refusal
A provision in an
agreement that requires the owner of a property to
give another party the first opportunity to
purchase or lease the property before he or she
offers it for sale or lease to others.
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Roll-over
Mortgage
A mortgage loan
where the interest rate is established for a
specific term. At the end of this term the
mortgage is said to "roll over" and the
borrower and lender may agree to extend to loan.
If satisfactory terms cannot be agreed upon, the
lender is entitled to be repaid in full. In this
case, the borrower may seek alternative financing.
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Second
Mortgage
This is usually at
a higher interest rate and represents the
difference between the price of the house and
first mortgage plus the down payment. This may be
obtained from banks and finance companies or
through lawyers or notaries.
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Semi-monthly
Payments
Payments are taken
twice a month, usually on the 1st and the 15th.
Payments are one half of the monthly amount. Less
aggressive at attacking principle than a bi-weekly
payment method.
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Survey
A drawing or map
showing the precise legal boundaries of a
property, the location of improvements, easements,
rights of way, encroachments, and other physical
features.
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Term
In a mortgage,
"term" is the actual length of time for
which the money is loaned, at that particular rate
of interest. After the term expires, you can
either repay the balance of the principal then
owing or renegotiate the mortgage at current rates
and conditions.
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Title
A legal
document evidencing a person's right to or
ownership of a property
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Title
Insurance
Insurance that
protects the lender (lender's policy) or the buyer
(owner's policy) against loss arising from
disputes over ownership of a property.
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Title
Search
A check of the
title records to ensure that the seller is the
legal owner of the property and that there are no
liens or other claims outstanding.
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Trustee
A fiduciary who
holds or controls property for the benefit of
another.
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Underwriting
The process of
evaluating a loan application to determine the
risk involved for the lender. Underwriting
involves an analysis of the borrower's
creditworthiness and the quality of the property
itself.
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Underwriting
Fees
A sum of money
collected by some lenders to offset expenses
incurred in the lending transaction.
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Unsecured
Loan
A loan that is not
backed by collateral.
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Variable
Rate Mortgage (Floating Rate)
A mortgage where
payments can be fixed from one to five years, but
the interest rate could change from month to month
depending on market conditions. If interest rates
go down, the monthly principal is reduced; if
rates go up, the monthly payments might not cover
the interest owing and payments may be increased
for the next term. Most variable rate mortgages
allow prepayment of any amount (with certain
minimums) on any monthly payment date and usually
without penalty.
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Vendor
Financing (Balance of Sale)
The seller
sometimes takes the mortgage at a rate lower than
market rates. Most of these arrangements are not
renewable nor transferable to the next owner.
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Vendor-Take-Back
When the vendor
(seller) of a property provides some or all of the
mortgage financing in order to sell the property
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Weekly
Accelerated Payments
Same as bi-weekly
accelerated. Your payments will be one quarter of
your normal monthly payment. More aggressive than
simple weekly payments as sometimes there are 5
weeks in the month and you will have 5 payments in
that month. This will happen at least 4 times a
year.
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