If you're new to the world of hard money loans and flipping houses, chances are, you'll come across a huge number of terms and phrases that you might not understand. This week, in part one of our glossary, we share some of the most common mortgage and hard money terms and their meanings, to get you well on your way to understanding all of the ins and outs of the property industry.
acceleration clause - the acceleration clause in a mortgage allows the mortgage lender to "accelerate" the payments made, meaning that they can demand the outstanding balance of the mortgage. Common reasons for an acceleration clause being used include a borrower defaulting on the loan or adding another individual to the mortgage without notifying the lender.
amortization - amortization is basically a fancy word for the way that a mortgage is paid back. When you pay your mortgage, a portion of that payment goes towards the interest, and the rest goes towards paying off the principal loan (the amount of money that has been borrowed). Over time, as the interest and the principal portion of the mortgage is reduced as you make more payments, the amount of money applied to the principal part of the mortgage is increased, so that the loan can be paid off (amortized) within the right amount of time.
amortization schedule - a payment schedule which shows how much money will be allocated to paying off the principal amount and the interest over the duration of the mortgage.
adjustable rate mortgage (ARM) - an ARM is simply a mortgage that has an adjustable rate. Adjustable rates are always tied to indexes and the amount you pay out each month will differ depending on the activity of the index.
adjustment date - should the ARM on your mortgage differ, you will be given an adjustment date so that you know when the mortgage payment will change.
annual percentage rate (APR) - the annual percentage rate is not the note rate on your mortgage, but is instead a figure calculated by government, displayed as a percentage, designed to give you some idea of the true annual cost of borrowing the mortgage.
application - the form used when you're in the process of applying for a loan, mortgage or hard money loan.
appraisal - a written report of the amount paid for a property. Appraisals tend to be based on the price paid for properties in the surrounding area.
appraised value - based on the knowledge of a specialist appraiser, the approximate market value of a home. The appraised value will typically be based on the property itself, as well as properties in the area. For example, a property that has all the mod-cons, like a fancy kitchen and bathroom, will typically be worth more than a property without - depending on the maximum property value in the area.
appraiser - an appraiser is a person trained to value properties. Typically, appraisers will have prior experience as real estate agents or mortgage advisors. Some work with mortgage brokers, whilst others work independently.
appreciation - the appreciation of a property means the increase in value of the property. Typically, properties appreciate in value because of favorable market conditions, because of changes made to the property, or due to inflation.
assessed value - the assessed value of a home differs from the appraised value. The assessed value of a property is for tax purposes and is always performed by an assessor.
asset - an asset is simply an item that may be of a high value owned by an individual. Liquid assets are assets that can be converted to money very quickly, such as stocks, bank accounts, stocks and bonds. Assets can also include real estate, cars and personal property. In the world of hard money, loans will typically be secured against an asset such as the home that is being purchased, or another asset such as a car.
assignment - when the ownership of your mortgage is transferred to another individual or to a company, it is called an assignment.
assumable mortgage - an assumable mortgage can be transferred or "assumed" by the buyer that purchases the property. Not everyone can be accepted for an assumable mortgage and most will have to qualify first.
balloon mortgage - a balloon mortgage differs to a normal mortgage in that there is a "balloon" payment at the end of the mortgage. For example, a normal mortgage may be spread over thirty years, whereby in a balloon mortgage, the mortgage will be paid for ten years or another set period and the balance of the mortgage will be paid in one large balloon payment. A balloon payment is simply the large payment made at the end of a loan period.
bankruptcy - when an individual is bankrupt, it means that they have relieved themselves of debts and liabilities. The most common form of bankruptcy within the US is a Chapter 7 No Asset. Although bankruptcy can help, it is a measure of last resort. It is very hard to re-establish trust with lenders following a bankruptcy and you'll typically find it hard to be accepted for things like mortgages or credit cards.
bridge loan - a bridge loan is a loan used to "bridge the gap". It's a short term loan and may be used to purchase a property until a permanent loan can be secured. Some people mistake hard money loans for bridge loans, but there is a big difference - hard money loans are permanent.
cap - in this sector, a "cap" is the limit that an adjustable rate mortgage can go to. Some ARMs do have limits, or caps, and others do not. The safest way to go, if you're applying for a fixed rate mortgage, is to find one with a cap, so that you know that you monthly payments won't go over a certain amount of money.
cash out refinance - when a property is refinanced, also known as re-mortgaged, at a higher amount than the current remortgage for the purposes of getting access to funds for personal use.
For more mortgage terms, come back next week for part two of our glossary.