Stories about foreclosure dominate the media. Adjustable rate mortgages continue to adjust, putting more and more people in an uncomfortable financial situation. Efforts to stem foreclosures by HUD (the United States department of Housing and Urban Development) and other groups cannot save every home, especially when homeowners do not take the time to understand their options.
It seems that a whole new vocabulary has emerged. Homeowners unable to make their payments and unable refinance due to plummeting home values should study foreclosure terminology. Those who are fortunate enough to continue making payments should also understand the terms in order to read the news.
Foreclosure Terminology Defined
The news media has embraced its new vocabulary. Here is a brief listing of the most commonly seen terms:
- Adjustable Rate Mortgage (ARM): A mortgage that has a changeable rate, often at six month or one year intervals. Generally, these were set up to have below-market rates in order to keep payments low at the start, and then bumped up for higher payments later. Many homeowners who are in danger of foreclosing had Adjustable Rate Mortgages.
- Balloon Payment: A large payment due by the end of a set term to pay off the entire principal of a debt.
- Deferred Payment Mortgage: A mortgage that allows the homeowner to make delayed payments when their income is low during an initial period. See Balloon Payment.
- Fixed Rate Mortgage (FRM): A traditional mortgage that has a set rate (e.g. 5.2%) for the life of the mortgage. This is in contrast to Adjustable Rate Mortgages.
- Foreclosure: A legal action taken by the lender (often a bank) when the borrower (the homeowner) does not pay the monthly installment or payment.
- Grace Period: A period of time between the due date and the overdue date where no late payment penalty applies (e.g. due August 1 and overdue August 8 means that penalties start on August 8).
- HUD: United States Department of Housing and Urban Development.
- Lien: A claim of money owed to a third party (such as a contractor) on the property.
- Market Value: The price tag for a property that able and willing buyers are ready to pay.
- Mediation: Settling differences between lenders and borrowers through a mutually agreed upon third party (such as an attorney at law).
- Moratorium: Temporary suspension of loan repayment.
- Negative Amortization: The adding of unpaid interest to the principal, thereby increasing the amount of the principal.
- PITI: Principal, Interest, Taxes, and Insurance.
- Refinance: Paying off the initial loan through negotiating a second loan, often at a lower percentage rate than the first loan.
- REO: Real Estate Owned. A piece of real estate that is owned by the lender through foreclosure.
- Short Sale: A home sale in which the proceeds fall short of what the owner still owes on the mortgage (e.g. a homeowner owes $300,000 on a house that is sold for $250,000). Some lenders may agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage (in previous example, the homeowner does not owe the remaining $50,000).
Talking to Banks About Foreclosure
Whether a homeowners is saddled with an adjustable rate mortgage that is scheduled to adjust or is facing a hardship due to unemployment and cannot make their mortgage payments, talking to the bank is the first step to resolving the situation. Reviewing these terms in advance can help a distressed homeowner to understand the options.
Understanding the News About Foreclosures
Ignorance provides fertile breeding ground for fear and panic. As stories of the real estate crisis continue to saturate the media, knowing the difference between foreclosures, short sales and deeds in lieu can give a homeowner peace of mind.
When it comes to finances, an ounce of prevention is worth a pound of cure. Take time to get educated about the terms that might be found in a contract. Be prepared. Ask questions. And when necessary seek the advice from good counsel.
Sources:
Bank Foreclosures’s Glossary of Foreclosures
Loan Modification Made Simple’s Glossary of Loan Modification Terms
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