This collection of terms is not intended as an exhaustive compilation of real estate terms but rather a highlight of the most commonly used words and phrases used in the Triangle Area of North Carolina (our marketplace). If you have a question about a particular word or term that is not listed, please let us know and we’ll gladly consider it for a future revision. We’d love to hear from you and help answer your questions!
Adjustable Rate Mortgage (ARM) – a mortgage having an interest rate that can change over time. The rate for an ARM typically consists of two components, and Index and a Margin. These are combined to form the prevailing rate. The prevailing rate can change over time, typically on a yearly schedule after an initial fixed period, hence the name Adjustable Rate Mortgage. In reality, the Index is the piece that can change over time. Some ARMs will use the yield on a 5 or 10 year Treasury Bill as the Index. When combined with the margin, the total interest rate can be determined. When shopping for an ARM, you should consider the length of time for the initial initial period where the rate doesn’t change as this can differ by product. ARMs are typically marketed using a series of numbers e.g. 7-1 ARM. The numbers represent (in order) the length in years for the Initial Period where the rate remains fixed, followed by the annual schedule where the rate is adjusted. With a 7-1 ARM, the rate is fixed for 7 years and thereafter adjusts every year. Most ARMs contain language which caps the amount the rate can change during every adjustment as well as a maximum cap over the life of the loan. While there is some uncertainty with this product, the initial low rate can be attractive for someone who does not plan to remain in the home for longer than 5 years e.g. first time home buyer.
Closing – the meeting when the parties involved in the sale gather and sign documents is usually referred to as the Closing. In actuality, the Closing occurs when certain documents signed at the meeting are recorded with the county Register of Deeds.
Closing Agent or Closing Attorney – in North Carolina every purchase closing must be handled by an attorney. This attorney is usually referred to as the Closing Agent or Closing Attorney. see Closing.
Down Payment – the amount of money you contribute towards the purchase of a home, not including the closing costs (attorney fees, lender fees, etc.). See PMI, Seasoning
Escrow Account – an account maintained by your lender for your benefit as a source of funds to cover annual or periodic invoices. Escrow accounts are most typically established for annual hazard insurance premiums and annual or semi-annual property tax payments. see Property Taxes.
Fixed Rate Mortgage – a mortgage having a rate that does not change over time. Because the rate does not change, the monthly payment remains unchanged each and every month until the loan is paid off. As each payment is made, a portion (the Principal) is applied to reduce the loan balance. The rest is either Interest on the loan or Interest plus Escrows. As the loan balance decreases, the amount of interest that is charged is reduced and since the payment amount does not change, this increases the amount of money that is applied as Principal. and this has the effect of The Principal is the portion that pays down the outstanding debt (loan) and the Interest represents the cost of borrowing money. As payments are made, principal is applied to the loan balance thus reducing the amount that is owed. The Rate is applied to the remaining balance and the difference between the interest calculated and the fixed monthly payment represents the amount of principal that is applied to the new balance. This process repeats itself every month until the loan is paid off. Because of the way in which the principal and interest are calculated, borrowers pay more interest in the earlier years of the mortgage and much less at the end. This schedule of payment allocations over time can be visualized by preparing a Loan Amortization Schedule.
Index – One of the two components that constitute an adjustable rate. The Index is the variable portion of the Adjustable Rate Mortgage (ARM) as it can fluctuate over time based on market conditions. The Index is usually an easily referenced market value such as the 1-year Treasury Bill yield or the London Inter-Bank Offered Rate (LIBOR).
Interest – the amount charged to borrow money. The cost of borrowing money. Since money in the future is worth less than money today, lenders charge Interest to compensate for the lesser value of money collected in the future. Interest can be a fixed amount that does not change year to year, or it can be variable or adjustable.
Loan Amortization Schedule (Amortizing) – a breakdown of each payment showing the allocation of principal and interest over a period of time. Most loan amortization schedules will display this information for the life of the loan. Lenders often include a loan amortization schedule as part of the package that is reviewed with the Closing Attorney.
Mortgage Payment – a payment made, customarily on a monthly schedule, in order to pay down (pay off) a borrowed sum of money (“mortgage”). Although North Carolina is not a mortgage state (we use Deeds of Trust), many still refer to the monthly payment as the mortgage payment. The mortgage payment can consist of two or more components, namely the Principal and Interest. If the payment includes escrows, then it may contain portions of the annual property tax bill and/or hazard insurance premium. If the loan was for more than 80% of the value of the home being purchased or financed, then the mortgage payment may include a charge for PMI.
Multiple Listing Service (MLS) – a database of properties listed for sale and maintained by the local real estate board. In addition to square footage and room dimensions, the MLS listings capture many details on the condition of the home, including recent updates and interior photos. This makes the MLS is an excellent source of historical records for preparing market analyses. Real estate licensees (agents) are required to measure every listing, so MLS data is more reliable than tax records, where square footage can be off by hundreds of square feet. And since heated square footage plays a prominent role in determining value, tax records should not be used for extrapolating market value.
Property Taxes – an ad-valorem tax (based on property value) that is paid to county, city or other municipal government. The amount of property tax is determined by multiplying the property’s Assessed Value by the prevailing tax rate. see Property Tax Rate, Assessed Value.
Property Tax Rate – also referred to as millage, the property tax rate is the percentage of property tax that is to be paid for a specific parcel within the jurisdiction of the taxing authority. Property Tax Rates are typically approved by the appropriate governing body (County and City/Town, etc.) in late June and statements are mailed soon thereafter. While property taxes are due in September, they are typically not late until early January. If your taxes are escrowed by your lender, the lender will make payment sometime in the Fall. Taxes in the Triangle are typically collected by the appropriate county Tax Collector and will include the county taxes plus any underlying municipal taxes. If your property is located outside of the city limits, then you will likely only pay the county tax rate. If your property is within the city or town limits, you will combine the county and city/town rates to determine the effective tax rate.
Private Mortgage Insurance (PMI) – an insurance policy paid for by borrowers, either upfront in one lump sum at Closing or in monthly installments along with the Mortgage Payment, to protect a lender against loss in the event of a borrower default.
Register of Deeds – the county Register of Deeds is responsible for recording documents in the public domain. When real estate is sold between parties, that exchange is recorded in the official public record. The record can later be referenced by government officials, courts, creditors, etc.
Seasoning – a term which refers to the length of time that money has held in a verifiable bank account. Some lenders feel that it is important for deposit money to be ‘seasoned’ in an account for two statement periods to demonstrate that the money is not needed to cover regular expenses.