Partial payment: A payment that is not sufficient to cover the scheduled
monthly payment on a mortgage loan.
Passive activity: For tax purposes, these activities include real estate
rentals, regardless of participation, and trades or businesses where you do not
materially participate. Losses are limited to passive income plus a special $25,000
allowance for rental real estate.
Passive income: Income from an activity in which you do not actively participate.
The distinction between active and passive income is critical because passive losses
can only be taken against passive income, not active income.
Payment change date: The date when a new monthly payment amount takes effect
on an adjustable-rate mortgage (ARM) or a graduated-payment adjustable-rate mortgage
(GPARM). Generally, the payment change date occurs in the month immediately after
the adjustment date.
Periodic payment cap: For an adjustable-rate mortgage (ARM), a limit on the
amount that payments can increase or decrease during any one adjustment period.
Periodic rate cap: For an adjustable-rate mortgage (ARM), a limit on the
amount that the interest rate can increase or decrease during any one adjustment
period, regardless of how high or low the index might be. See
Personal property: An asset that is moveable, such as furniture and equipment.
PITI: See Principal,
interest, taxes, and
PITI reserves: A cash amount that a borrower must have on hand after making
a down payment and paying all closing costs for the purchase of a home. The principal,
interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower
would have to pay for PITI for a predefined number of months.
Planned unit development: See PUD.
Points: Payments to secure a loan, stated as a percentage of the borrowed
amount. For example, 1 point is 1.5% of the loan.
Power of attorney: The written document that authorizes someone, known as
an Attorney-in-Fact, to act for another person. The authorized actions can include
signing legal documents and writing checks. If the document gives the attorney-in-fact
authority to act on all matters, it is a general power of attorney. If the document
limits the attorney-in-fact’s authority to specific matters (for example, selling
a particular piece of real estate), then it is a limited or special power of attorney.
Prearranged refinancing agreement: A formal or informal arrangement between
a lender and a borrower wherein the lender agrees to offer special terms (such as
a reduction in the costs) for a future refinancing of a mortgage being originated
as an inducement for the borrower to enter into the original mortgage transaction.
Preforeclosure sale: A procedure in which the investor allows a mortgagor
to avoid foreclosure by selling the property for less than the amount that is owed
to the investor.
Prepayment: Any amount paid to reduce the principal balance of a loan before
the due date. Payment in full on a mortgage that may result from a sale of the property,
the owner's decision to pay off the loan in full, or a foreclosure. In each case,
prepayment means payment occurs before the loan has been fully amortized.
Prepayment penalty: A fee that may be charged to a borrower who pays off
a loan before it is due.
Pre-qualification: The process of determining how much money a prospective
home buyer will be eligible to borrow before he or she applies for a loan.
Prime rate: The interest rate that banks charge to their preferred customers.
Changes in the prime rate influence changes in other rates, including mortgage interest
Principal: The amount borrowed or remaining unpaid. The part of the monthly
payment that reduces the remaining balance of a mortgage.
Principal balance: The outstanding balance of principal on a mortgage. The
principal balance does not include interest or any other charges. See
Principal, interest, taxes, and insurance (PITI): The four components of
a monthly mortgage payment. Principal refers to the part of the monthly payment
that reduces the remaining balance of the mortgage. Interest is the fee charged
for borrowing money. Taxes and insurance refer to the amounts that are paid into
an escrow account each month for property taxes and mortgage and hazard insurance.
Principal residence: The dwelling where the borrower maintains his or her
permanent place of abode, and typically spends the majority of the calendar year.
A person may only have one principal residence at only one time for tax purposes.
Private annuity: A means of transferring property to heirs that freezes the
gift and estate tax value of appreciating property to the value at the date of a
sale. The property owner transfers real estate to children or other family members
and reserves the right to receive a fixed annuity amount each year until his death.
Private letter ruling: These are written pronouncements from the IRS interpreting
the Internal Revenue Code with respect to a specific set of facts and circumstance
that arise from a taxpayer’s request to interpret the law. Where the tax consequences
are substantial and justify the legal costs, it is often advisable to obtain a private
letter ruling before engaging in a transaction.
Private mortgage insurance (MI): Mortgage insurance that is provided by a
private mortgage insurance company to protect lenders against loss if a borrower
defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV)
percentage in excess of 80 percent.
Probate: The judicial process of proving a will is valid and administering
the estate of a deceased person. Avoiding probate is often desirable given the statutory
and court fees, costs of hiring attorneys, executors and administrators, and the
delays that are incurred in the process.
Probate property: Assets owned by the decedent in his or her name alone or
as tenant in common on the date of his or her death that pass by will or the laws
of intestacy to another party.
Promissory note: A written promise by a person (known as the maker, obligor,
payor, or promisor) to pay another person (known as the obligee, payee, or promisee)
a sum of money (the principal) that usually includes interest to be charged on the
unpaid principal amount.
Public auction: A meeting in an announced public location to sell property
to repay a mortgage that is in default.
PUD - Planned Unit Development: A project or subdivision that includes common
property that is owned and maintained by a homeowners' association for the benefit
and use of the individual PUD unit owners.
Purchase and sale agreement: A written contract signed by the buyer and seller
stating the terms and conditions under which a property will be sold.
Purchase money transaction: The acquisition of property through the payment
of money or its equivalent.