Taxes and Insurance

You'll hear many terms as you work with your mortgage lender, and one of the most frequently mentioned is "PITI." This abbreviation stands for principal, interest, taxes and insurance.

The tax and insurance components of a mortgage payment are generally held by the lender in an escrow account. The lender pays any property tax and homeowner's insurance bills as they are due, ensuring they are paid on time.

A home buyer's monthly mortgage payment generally covers expenses through the escrow account. If you don't have your homeowner's insurance and property taxes paid out of a lender escrow account, your local government and your property insurance company will send payment notices directly to you. It is your responsibility to make sure you pay these bills on time.

If you're planning to purchase a condominium or cooperative, talk to your lender about how they view condo and co-op fees. Most likely, they are considered housing costs and not a part of PITI. However, this can vary from lender to lender.

Tenancy by the Entirety

A type of joint tenancy of property that provides right of survivorship and is available only to a husband and wife. Contrast with tenancy in common.

Tenancy in Common

A type of joint tenancy in a property without right of survivorship. Contrast with tenancy by the entirety and with joint tenacy.

Tenant-Stockholder

The obligee for a cooperative share loan, who is both a stockholder in a cooperative corporation and a tenant of the unit under a proprietary lease or occupancy agreement.

Termite Inspection

Homes in many parts of the country must be inspected for termites before they can be sold. You should receive a certificate from a termite inspection firm stating that the property is free of both visible termite infestation and termite damage.

The cost of the termite inspection is usually paid by the seller, and the seller's real estate sales professional orders the inspection. You need to make sure that the original certificate is delivered to your lender at least three days before closing.

This allows the lender to review the certificate and address any potential problems.

Third-Party Origination

A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Also see "Mortgage Broker" entry

Thrifts

Thrifts are depository institutions that primarily serve consumers and include both savings banks and savings and loan (S&L) institutions. These institutions originate and service mortgage loans. A thrift may choose to hold a loan in its own portfolio or sell the loan to an investor.

Title

A legal document evidencing a person's right to or ownership of a property.

Title Search

A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

In order to make sure the borrower will receive clear title to the property, lenders require a title search. It attempts to uncover any "encumbrances" on the title and makes sure the seller is the actual owner of the property.

Encumbrances include any liens -- legal claims against a property filed by creditors as a means to collect unpaid bills. Liens can also be filed by the Internal Revenue Service for nonpayment of taxes. Any such claims must be paid by the seller -- this often occurs either before or at the closing.

Title Company

A company that specializes in examining and insuring titles to real estate.

Title Insurance

Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Your lender will require that you buy title insurance to ensure that you are receiving a "marketable title." There are two types of title insurance policies:

-- Lender's policy (mandatory): This protects the lender should a flaw in the title be detected after the property has been purchased.
-- Owner's policy (optional, but recommended): This protects you should a flaw in the title be detected after the property has been purchased.

Generally, the buyer pays the cost of both policies. Check with your insurer, because you may receive a price break if you seek a combined lender/owner policy or if you purchase a "reissue" policy from the company that previously insured the title.

Total Expense Ratio

Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts.

Townhouse

A townhouse is similar to a condominium in that it's a type of joint real estate where each housing unit is individually owned. However, it has two or more stories, rather than the typical one floor found in a condominium.

Townhouses are available in many shapes and sizes, and most may have yards or common spaces that can be used by the owners.

Trade Equity

Equity that results from a property purchaser giving his or her existing property (or an asset other than real estate) as trade as all or part of the down payment for the property that is being purchased.

Transfer of Ownership

Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property "subject to" the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device. In cases in which an inter vivos revocable trust is the borrower, lenders also consider any transfer of a beneficial interest in the trust to be a transfer of ownership.

Transfer Tax

State or local tax payable when title passes from one owner to another.

Treasury Index

An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

See Also "Adjustable-Rate Mortgage (ARM)"

Trustee

A fiduciary who holds or controls property for the benefit of another.

Truth-in-Lending

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

Your lender should provide you with the Truth-in-Lending (TIL) Statement within three business days of your loan application. This document outlines the costs of your loan, and it is given to you so you can compare the costs with those of other lenders. Among the costs listed:

-- The annual percentage rate (APR), which is the cost of your mortgage compiled as a yearly rate. It may be higher than the interest rate stated in your mortgage because it includes points and other costs of credit.
-- The finance charge.
-- The amount financed.
-- The payment amount.
-- The total payments required.

The lender is required to give you the final version of your TIL Statement at or prior to the closing meeting because it is possible that the APR calculated at your loan application will change at closing.

Two-Step Mortgage®

The Two-Step Mortgage is a special type of adjustable-rate mortgage (ARM) that adjusts only once. Depending on whether you select a five-year or seven-year Two-Step Mortgage, your interest rate will adjust once at the end of either five or seven years. Then, your interest rate stays the same for the remaining 25 or 23 years of your 30-year loan.

Advantages:

-- You can qualify with a low starting interest rate. Your initial interest rate is only slightly higher than a balloon loan and is often lower than a 30-year fixed rate loan.
-- You get stable, predictable payments for five or seven years and, after adjustment, for the remaining 25 or 23 years of the loan.
-- You are protected from rising interest rates during the early years of homeownership.
-- You do not have to re-qualify or pay refinance costs at the time the interest rate adjusts.
-- You have time to increase your earnings or accumulate additional assets before the interest rate adjusts at the end of five or seven years.

Details:

-- Your interest rate cap can be no more than 6 percent above your initial interest rate.
-- You can use this mortgage to buy one- to four-family residences including second homes and condos, co-ops and planned unit developments.
-- Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)

Two- to Four- Family Property

A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed.