Smith - Your Dream Home: A Comprehensive Guide to Buying a House, Condo, or Co-op

Many people and organizations provided information, data, and advice that greatly enriched this book. In particular I would like to thank the American Homeowners Foundation; the Building Research Council of the University of Illinois at Urbana-Champaign; Robert Clarfeld and Paul Wrobleski of Clarfeld & Co.; Hugh Siler of Coldwell Banker; Ana Maria da Hora of the East Boston Ecumenical Community Council; Helen Szablya of the Fannie Mae Foundation; Marci R. Schneider of the Federal Reserve; Jeanne Salvatore of the Insurance Information Institute; Pamela Baldwin of the Joint Center for Housing Studies at Harvard University; Andrew Kochera and Jay Shackford of the National Association of Home Builders; Elizabeth Johnson of the National Association of Realtors; Jane DeMarines, David Fried, and Kathleen Luzik of the National Cooperative Bank; Lee Pickett; and Heloisa Souza.

At MONEY magazine, thanks to managing editor Frank Lalli, who has helped me at several stages of my career. Many of my MONEY coworkers made valuable contributions, including Caroline Donnelly, Richard Eisenberg, Carla Fried, and Lani Luciano. Book editor Dan Green was most attentive to the project. My agent Jim Charlton showed faith in me and the book from the beginning.

At Warner Books, I am fortunate in my editor, Rick Wolff, a coach of diverse talents. He has enhanced the performance of the Cleveland Indians and myriad writers. I am pleased to be one of the latter; I wish I could be one of the former.

And most of all, warm thanks to my loved ones on the domestic front: my husband, Larry, and stepchildren Erik and Flavia. They sometimes make my house a wreck, but they always make it my home. I wouldnt have it any other way.

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Real estate transactions have a language all their own. Here are definitions of some words and terms that you may encounter in the course of buying your home. Meanings may vary somewhat in different contexts or among regions of the United States.

Abstract of title:A condensed history of the legal title of a piece of real estate.

Acceleration clause:A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Actual cash value:The replacement cost of an item minus depreciation.

Adjustable-rate mortgage:A mortgage loan whose interest rate and payments fluctuate up or down, usually once or twice a year according to changes in a specified index.

Adjustments:Incidental expenses that show up on the settlement sheet that you sign when you buy or sell a house.

Amortization:The payment of a debt, such as a mortgage loan, through regular installment payments that include both principal and interest.

Amortization schedule:A timetable for payment of a mortgage, showing the amount of each payment applied to interest and principal and the remaining balance.

Annual percentage rate (APR):The cost of credit expressed as an annual percentage of the loan amount. It usually includes a combination of the base interest rate, points, and other fees the borrower paid to the lender to acquire a mortgage. The APR, which is usually slightly above the actual interest rate alone, is the most meaningful measure for comparing the cost of mortgage loans offered by different lenders.

Appraisal:A professional opinion of a houses value based on recent, verifiable information of sales (or rentals, if applicable) of comparable properties in its vicinity.

Appreciation:An increase in the value of a house due to changes in market conditions or other causes.

As is condition:The seller will make no repairs to the house before settlement.

Assessed value:The valuation placed upon property by a public tax assessor for purposes of taxation.

Assumable loan:An existing mortgage that can be taken over (assumed) by a buyer, usually on the same terms as those given to the original buyer. An assumable mortgage loan can make a home more attractive to buyers.

Balance:An amount of loan remaining to be paid; sometimes known as the outstanding balance.

Balloon mortgage:A loan with monthly payments that are too small to retire the debt within the specified term. The balance must be paid in full when the term expires.

Binder:A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Bridge loan:A 30- to 120-day loan secured by equity in your house. The proceeds are used to make the down payment on a new house when you havent yet sold the old one.

Broker:A person who has met state real estate licensing standards and can conduct real estate transactions. Many brokers have their own firms.

Buy-down:A payment of interest in advance to temporarily reduce the interest rate on a mortgage loan.

Buyers broker:A real estate agent who represents the buyer, sometimes for a fee, sometimes for a commission from the listing broker.

Cap:A limit on how much the rate of interest or the monthly mortgage payments can fluctuate during the life of an adjustable-rate mortgage.

Cash reserve:A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.

Certificate of occupancy:A certificate issued by the building department of the local or county government to a builder or owner, stating that the building is in proper condition to be occupied and specifying the legally permissible use.

Clear title:A title that is free of liens and legal questions as to ownership of the property.

Closing:The meeting at which title to a property passes from the seller to the buyer. Closing is also known as settlement.

Closing costs:Fees and expensesapart from the actual purchase price of the propertyassociated with transferring a property from a seller to a buyer, among them lawyers fees, survey charges, title searches and insurance, and fees to file deeds and mortgages.

Collateral:Something of value that serves as security for a loan.

Commitment letter:A formal offer from a lender stating the terms under which it will lend money to a buyer for the purchase of a home.

Community Home Buyers Program:An alternative Fannie Mae financing option that allows households of modest means to qualify for mortgages using nontraditional credit histories, 33% housing-to-income and 38% debt-to-income ratios, and the waiver of the standard two-month mortgage payment reserve requirement at closing.

Condominium:A form of property ownership in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multiunit project, and sometimes the exclusive use of certain limited common areas.