Banking Terms

• Amortization: The elimination of the mortgage debt through regular payments over a specific length of time. Payments must be large enough to cover both principal and interest.

   

• Debt Ratio: A comparison between your total assets (gross income, cash, equity in property, etc.) and total debts (credit cards, student loans, car loans, etc.).

   

• Deed: Legal document that transfers title of the property to the buyer.

   

• Earnest Money: Funds the buyer deposits with the seller to indicate seriously interest in purchasing the space.

   

• Escrow: An account set up by the lender where funds for the buyer's insurance and property taxes are held until payments are required. The lender typically makes payments for these expenses from this account.

   

• Equity: Represents the difference between what you owe on the property (the mortgage) and what the property is actually worth. For example, if the value of a home purchased for $115,000 increases to $125,000 after five years, but the buyer still owes $75,000 on the mortgage, the difference between the property's value and the mortgage amount owed is $50,000 ($125,000 - $75,000). This equals $50,000 in equity in the property.

   

• Interest Rate: The amount of money you are charged for using the lender's money to purchase the property. Is based on the risk of the loan and prevailing market rates.

   

• Lien: A legal claim against the property, used to secure loans; they must be paid first if the building is sold. For example, the lender puts a lien against the building when you take out a mortgage to purchase it. Other types of liens include property taxes, from the Internal Revenue Service, court-ordered, etc.

   

• Mortgage: A type of loan specifically used to finance the purchase of real estate. Several types are available.

   

• Mortgagee: The bank, credit union or other financial institution that loans money to purchase real estate.

   

• Mortgagor: This borrower who accepts the loan.

   

• Principal: The original amount of money borrowed for the mortgage. Does not include the interest rate.

   

• Term: The length of time the borrower has to pay back the principal with interest. The longest mortgage term for residential properties is typically 30 years.

   

• Title: The legal document that denotes ownership of real estate.

Other terms and their definitions will also appear in the text and will be defined as we go along.

If you are interested in learning more investment and financing market terms, visit Dictionary.com, Investor Words, Global Investor Glossary or ADVFN Financial Glossary.

For real estate terminology, visit the Real Estate Agent.com glossary.