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Mortgage and Real Estate Glossary ~ P

Payment cap

A limit on how much the monthly payments on an adjustable rate mortgage (ARM) can go up or down. Some ARMs have a payment cap, which is normally around 7.5%. Caps on monthly payments are rare since they can cause negative amortization, a situation where your mortgage balance increases despite regular monthly payments.

Example: How can a payment cap cause negative amortization on a $200,000 loan at 6% interest with a 7.5% payment cap?

If your interest rate goes up to 8%, you now have to pay $712 per month, up from $589. However, since you have a payment cap of 7.5%, the maximum that you have to pay is $634 ([$589 X 7.5%] + $589). Who eats the $44 difference? If the lender allows negative amortization, you have the choice to pay either the $634 or $712. If you opt to pay the lower amount, the $44 is added to your loan's principal, increasing the size of your loan.

Permanent loan

A long-term loan taken out upon completion of a new building. Permanent loans work together with construction loans. Here is how it works: land developers who buy large pieces of land to build homes on will first take out a construction loan on the property, which covers the entire lot. Then, when all the buildings are ready to sell, the lender offers each home buyer a permanent loan. Part or all of this money will go towards paying off the construction loan. Permanent loans are also called take-out loans.
See: Construction loan, Blanket mortgage

Personal property

Anything that you can own that is considered movable. Money, furniture, cars, clothes, even pets are examples of personal property. Land and anything attached to it is not personal property, but real property. You can move personal property from one place to another, and you can sell or buy personal property with or without a written contract.
See: Bill of sale,

Piggy back loan

If you can make a 10% down payment on a home, one way to avoid paying for Private mortgage insurance (PMI) is to get two loans. Here is how it works: you get a loan for 80% of a property's purchase price at a standard interest rate and then get a second, "piggy back" loan at 10% of the purchase price, though at a higher rate. This type of financing is commonly called 80-10-10. If the first loan is less than $227,150, you can opt for a 75-15-10 arrangement, which will give you a lower interest rate on the first loan. To figure out if getting a second loan makes sense for you, compare your monthly costs with a piggy back loan versus PMI.
See: Private mortgage insurance, Second mortgage

Planned Unit Development (PUD)

A type of housing project that has five or more individually owned homes and each owner has a share of the common areas. PUDs are generally found in suburban areas. You own your home and the land it's on, as well as a part of the areas that you share with other home owners, like the grounds and swimming pool. Similar to a condominium, you have to pay an owner's association monthly fees to maintain the common areas.
See: Cooperative

Point

One percent of the total loan amount. Loan rate points can be either positive (discount points) or negative (rebate points). The more positive points you choose to pay up-front, the lower your interest rate will be. For every point you pay, your rate will go down by about .25%. On the other hand, you can opt for a loan with a higher interest rate in exchange for a rebate, which will give you a credit towards paying some of your non-recurring closing costs, such as title insurance, appraisal and origination fee. You can't get any cash back from rebate points.
See: Discount point, Origination fee

Portfolio loan

A loan that a lender holds onto instead of selling on the secondary market. Lenders pool and sell most loans to the secondary market in order to create money for more loans. But, to keep their in-house assets at a certain level, lenders keep some loans in their "portfolio." Since portfolio loans don't have to stick to the rules set by secondary market institutions, like the Federal National Mortgage Association (Fannie Mae), they have some appealing qualities, like letting you borrow large amounts. But, you may have to come up with a sizable down payment, or accept a high interest rate. Lenders who offer portfolio loans usually don't ask for heaps of documents to prove your income or assets.
See: Jumbo loan

Preapproval

When a lender commits to a loan before the borrower finds a property to buy. Even if you have not found a property, some lenders will give you a written preapproval on a loan. The benefits to
getting a preapproval are:
(1) you know exactly what you can afford to offer for a home
(2) you show a seller and your realtor how serious you are about buying a home

To get a preapproval, you have to fill out a standard loan application. Keep in mind that you the lender can only guarantee (lock) the loan's interest rate once you have found a property.
See: Prequalification

Preliminary title report

The results of a title search on a property. Before you go to closing, you will receive a preliminary title report from a title company. This report proves that the seller is the rightful owner of the property that you want to buy, and lists any claims against the property for unpaid debts, such as property and income taxes. Be sure to bring any claims that need to be cleared to the seller's attention.
See: Cloud on title, Title search, Title insurance

Premium

Regular payments made on an insurance policy. Insurance companies usually charge an annual premium when you open a home owner's insurance policy. For example, if you live in an area that is prone to earthquakes or floods, your premium will be higher to offset the extra risk that an insurance company takes.
See: Insurance, Homeowner's insurance

Prepaid items

Fees paid on the closing date to cover future costs like property taxes, interest, mortgage insurance and hazard insurance. Lenders want to make sure that their investment is secure, so they may require you to deposit a sum of money in an escrow account to prepay recurring costs, such as:
(1) your first six months of property taxes
(2) your first two months of hazard insurance
(3) your first two months of mortgage insurance, if required

The lender also collects the interest you owe for the period between the closing date and the end of the month. So, if September 3 is your closing date and you make your first monthly loan payment on November 1, you have to prepay the interest that is due through the end of September.
See: Impound account, Closing costs

Prepayment

A clause that allows a borrower to make larger (or additional) payments than the amount stated in the loan agreement. It's in your best interest to make extra or bigger monthly payments on your loan since this will reduce your loan balance quicker than if you only paid the amount that's due. You will also cut down the interest that you need to pay. Prepayment is also called the "or more clause."
See: Prepayment penalty, Amortization

Prepayment penalty

A fee that lender charges home owners if they pay more that is required on a monthly loan payment, or pay off the loan before its term ends. Loans with a prepayment penalty usually have a lower interest rate. But, in exchange for what seems a sweeter deal, you'll be slapped with a whopping penalty of up to 3% of your loan's amount if you decide to pay off the loan on your home, or refinance within the first 3 years of buying your home. The penalty also applies if you pay more than 20% of your unpaid loan balance in any year during this time. So, if market rates drop in the second year of owning a home, you may miss out on an opportunity to refinance to get lower monthly loan payments.

Prequalification

When a lender or broker figures out how much you qualify to borrow. Before shopping for a home, you can save yourself a lot of time by first finding out whether or not you are likely to qualify for the loan you want. Also, you will also get a rough idea of the price range that you can afford on a home. To do this, a lender or broker will look at your income, debt, assets and credit history. If all goes well, you will receive a prequalification letter that you can then show Realtors, so they feel confident about investing time and energy in your home search.

Principal

The amount borrowed on a loan. If you take out a loan for $100,000, the principal on the loan is $100,000. You repay the principal plus the interest and fees over the life of the loan. As you continue to pay off your loan, more and more of your payment goes to the principal, and slowly but surely the amount due shrinks away.
See: Amortization, Amortization schedule

Principal balance

How much the borrower has left to pay on the loan principal. It takes a quite while to bring down the loan's principal because for many years most of your monthly payment goes towards the loan's interest. It is worth the wait -- since the more of the principal you pay, the more equity you have in your property. You can find your principal balance on your loan statement from your lender.
See: Amortization schedule, Equity

Principal, interest, taxes and insurance (PITI)

The four major costs that a homeowner's mortgage payment covers.
Lenders use PITI in two ways:
(1) With most mortgage plans, the lender collects your monthly mortgage payment that covers the loan principal and interest, as well as one-twelfth of your property taxes and hazard insurance. The lender puts the taxes and insurance into a separate escrow account, and pays off these bills when they become due as a way to protect the loan.
(2) Before you apply for a home loan, lenders use a ball park estimate of your expected PITI to calculate your back ratio and front ratio. Lenders use these ratios as guidelines to find out if you qualify for a loan.
See: Back ratio, Front ratio

Private lender

A person who lends his or her own money to a home buyer. Ordinary people, similar to a bank, can lend money to home buyers as a way to invest in real estate. As a private lender, you can profit from offering a loan at a high interest rate. One way to find a borrower is to work with a mortgage broker who will do the leg work for you.
See: Non-institutional lender

Private mortgage insurance (PMI)

An insurance contract that protects the lender against loss if a buyer can't repay a loan. If your down payment (or equity) is less than 20% of the purchase price, a lender will require you to purchase PMI- this is the lender's safety net in case you default on a loan. How much you need to pay each month in insurance depends on the loan amount, the type of loan and the down payment.

Typically, it costs between .15% to 2.5 % of the loan amount. You might also have to pay one or two months of PMI payments in advance at closing, which is put into an escrow account. The good news is that you may not have to pay PMI forever - some lenders let you end the policy when, based on an appraisal, you show a lender that you have at least 20% equity in your home.
See: Down payment, Equity

Promissory note

A written promise to pay back a sum of money at a specific time. When you borrow money to buy a home, you must sign a promissory note, which outlines the loan's terms and sets the due date. The most common type of promissory note is called the installment note. This says that your monthly payment must be applied to both the loan's principal and interest. The promissory note enforces the document that secures the property as repayment for the loan, either called a deed of trust or mortgage depending on where your home is. Promissory notes are commonly called notes or IOUs.
See: Mortgage, Deed of trust

Public auction

A public sale of land or goods, where the highest bidder wins. If you hit a financial crisis and default on a mortgage, a lender will be forced to foreclose on your home and put it up for sale at a public auction. The rules for a public auction vary from state to state, but normally a lender must advertise the auction both in a county newspaper and in a public place several weeks before the sale. Anyone can make a bid at a public auction and it's common for home buyers to snag a great deal.
See: Judicial foreclosure, Trustee's sale

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