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Mortgage Glossary & Terms

You will find this glossary useful in understanding words or terms used in real estate transactions. However, there are some factors that may affect the following definitions:

  • Terms are defined as commonly understood in the mortgage and real estate industry. The same terms may have different meanings in other context.
  • The definitions are intentionally short and non-technical. They do not include all possible meanings that a term may acquire in legal use.
  • State laws may modify or change the meanings of certain terms defined.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

  • 203(b): FHA program which provides mortgage insurance to protect lenders from default; used to finance the purchase of new or existing one- to four family housing; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.
  • 203(k): this FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.

A

  • Abstract (of title): a summary of the public records relating to the title to a particular piece of land. An attorney or title insurance company reviews an abstract of title to determine whether there are any title defects which must be cleared before a buyer can purchase clear, marketable, and insurable title.
  • Acceleration clause: condition in a mortgage that may require the balance of the loan to become due immediately, if regular mortgage payments are not made or for breach of other conditions of the mortgage.
  • Agreement of sale: known by various names, such as contract of purchase, purchase agreement, or sales agreement according to location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy, under certain specific terms and conditions spelled out in writing and signed by both parties.
  • Amenity: a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, woods, water) or man-made (like a swimming pool or garden).
  • Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)
  • Annual percentage rate (APR): calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
  • Application: the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
  • Appraisal: a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
  • Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
  • ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly -payment amount, however, is usually subject to a cap.
  • Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.
  • Assumable mortgage: a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.

B

  • Balloon mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
  • Bankruptcy: a federal law whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
  • Binder or "offer to purchase": a preliminary agreement, secured by the payment of earnest money, between a buyer and seller as an offer to purchase real estate. A binder secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded.
  • Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
  • Building code: based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
  • Building line or setback: distances from the ends and/or sides of the lot beyond which construction may not extend. The building line may be established by a filed plat of subdivision, by restrictive covenants in deeds or leases, by building codes, or by zoning ordinances.
  • Budget: a detailed record of all income earned and spent during a specific period of time.

C

  • Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
  • Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
  • Certificate of title: a document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.
  • Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
  • Closing costs: these are customary lender and vendor fees associated with originating your mortgage or refinance loan. They are above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing.  They typically run from 3 to 5% of your loan amount but vary by geographic location and are typically detailed to the borrower after submission of a loan application. Ask potential lenders for an estimate of closing costs before you agree to a loan.
  • Cloud (on title): an outstanding claim or encumbrance which adversely affects the marketability of title.
  • Commission: an amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction.
  • Condemnation: the taking of private property for public use by a government unit, against the will of the owner, but with payment of just compensation under the government's power of eminent domain. Condemnation may also be a determination by a governmental agency that a particular building is unsafe or unfit for use.
  • Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.
  • Contractor: In the construction industry, a contractor is one who contracts to erect buildings or portions of them. There are also contractors for each phase of construction: heating, electrical, plumbing, air conditioning, road building, bridge and dam erection, and others.
  • Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.
  • Cooperative (co-op): residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
  • Credit history: history of an individual's debt payment; lenders use this information to gouge a potential borrower's ability to repay a loan.
  • Credit report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.
  • Credit bureau score: a number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.

D

  • Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; with the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
  • Deed: the document that transfers ownership of a property.
  • Deed-in-lieu: to avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn't allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.
  • Deed of trust: like a mortgage, a security instrument whereby real property is given as security for a debt. However, in a deed of trust there are three parties to the instrument: the borrower, the trustee, and the lender, (or beneficiary). In such a transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, he defaults in the payment of the debt, the trustee may sell the property at a public sale, under the terms of the deed of trust. In most jurisdictions where the deed of trust is in force, the borrower is subject to having his property sold without benefit of legal proceedings. A few states have begun in recent years to treat the deed of trust like a mortgage.
  • Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.
  • Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.
  • Depreciation: decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason.
  • Discount point: this is a lender fee typically charged to "buy down" your rate and pay less interest. Each point is equal to 1% of the mortgage or refinance amount. It is normally paid at closing.
  • Documentary Stamps: a state tax, in the forms of stamps, required on deeds and mortgages when real estate title passes from one owner to another. The amount of stamps required varies with each state.
  • Down payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This is the cash you contribute toward buying or refinancing your home. The lower your down payment, the less home equity you'll have.

E

  • Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
  • EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase.
  • Easement Rights: a right-of-way granted to a person or company authorizing access to or over the owner's land. An electric company obtaining a right-of-way across private property is a common example.
  • Encroachment: an obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring private or public land, or a building extending beyond the building line.
  • Encumbrance: a legal right or interest in land that affects a good or clear title, and diminishes the land's value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive convenants. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance, or what can be done to remove it.
  • Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.  With a fully amortizing mortgage, your loan balance decreases each month, which helps you to build equity provided home values remain steady.
  • Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

F

  • Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
  • Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
  • Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
  • FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
  • Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
  • Flood insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.
  • Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
  • Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for new homebuyers.
  • FRM or ARM: These are acronyms for fixed rate mortgage and adjustable rate mortgage. Generally, if you can qualify for a FRM, and you plan to keep your home for several years, it's a great choice. Payments remain consistent for the life of the loan. You can avoid fluctuating payments with a FRM. An ARM can be a good choice if you need lower payments for a few years, and plan to sell your home while the rate is still low.

G

  • General warranty deed: a deed which conveys not only all the grantor's interests in and title to the property to the grantee, but also warrants that if the title is defective or has a "cloud" on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic's liens against it) the grantee may hold the grantor liable.
  • Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as with Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.
  • Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
  • Grantee:that party in the deed who is the buyer or recipient.
  • Grantor: that party in the deed who is the seller or giver.

H

  • Hazard insurance: protects against damages caused to property by fire, windstorms, and other common hazards.
  • HELP: Homebuyer Education Learning Program; an educational program from the FHA that counsels people about the homebuying process; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium-from 2.25% to 1.75% of the home purchase price.
  • Home Equity (or Equity):  this is the difference between your mortgage amount and what your home is worth. With a fully amortizing mortgage, your loan balance decreases each month, which helps you to build equity provided home values remain steady.
  • Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.
  • Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; coverage extends over a specific time period and does not cover the home's structure.
  • Homeowner's insurance: an insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence or inappropriate action that result in someone's injury or property damage.
  • Housing counseling agency: provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.
  • HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
  • HUD1 Statement: also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.
  • HVAC: heating, ventilation and air conditioning; a home's heating and cooling system.

I

  • Index: a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.
  • Inflation: the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar's value.
  • Interest: a fee charged for the use of money .
  • Interest rate: this is the finance charge that the lender receives for loaning you the money to buy a home. It is always expressed as an annual percentage. It costs $12,000 to borrow $200,000 at 6% for a year.
  • Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

J

  • Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.

L

  • Lease purchase: assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
  • Lien: a legal claim against property that must be satisfied when the property is sold
  • Loan: money borrowed that is usually repaid with interest.
  • Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
  • Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
  • Lock-in: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
  • Loss mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan

M

  • Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
  • Marketable title: a title that is free and clear of objectionable liens, clouds, or other title defects. A title which enables an owner to sell his property freely to others and which others will accept without objection.
  • Mortgage: a lien on the property that secures the promise to repay a loan.
  • Mortgage banker: a company that originates loans and resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac.
  • Mortgage broker: a firm that originates and processes loans for a number of lenders.
  • Mortgage commitment: a written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a house.
  • Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.
  • Mortgage insurance premium (MIP): a monthly payment--usually part of the mortgage payment - paid by a borrower for mortgage insurance.
  • Mortgage modification: a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
  • Mortgage note: a written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.
  • Mortgage (open-end): a mortgage with a provision that permits borrowing additional money in the future without refinancing the loan or paying additional financing charges. Open-end provisions often limit such borrowing to no more than would raise the balance to the original loan figure.
  • Mortgagee: the lender in a mortgage agreement.
  • Mortgagor: the borrower in a mortgage agreement.

N

  • Negative Amortization:This occurs when monthly payments during the "teaser" period are too low to cover the full principle and interest payment. Unpaid interest is added to your mortgage loan balance each month. Negative amortization erodes your home equity and can cause you to owe more on your home than it's worth.

O

  • Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.
  • Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
  • Origination fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing.

P

  • Partial claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
  • PITI: principal, interest, taxes, and insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
  • Plat: a map or chart of a lot, subdivision or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements.
  • PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
  • Points: sometimes called "discount points." A point is one percent of the amount of the mortgage loan. For example, if a loan is for $25,000, one point is $250. Points are charged by a lender to raise the yield on his loan at a time when money is tight, interest rates are high, and there is a legal limit to the interest rate that can be charged on a mortgage. Buyers are prohibited from paying points on HUD or Veterans' Administration guaranteed loans (sellers can pay, however). On a conventional mortgage, points may be paid by either buyer or seller or split between them.
  • Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
  • Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
  • Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.
  • Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.
  • Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
  • Principal: the amount borrowed from a lender; doesn't include interest or additional fees.
  • Purchase agreement: See Agreement of sale.

Q

  • Quitclaim deed: a deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor's interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has. (See Deed.)

R

  • Radon: a radioactive gas found in some homes that, if occurring in b enough concentrations, can cause health problems.
  • Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
  • Real estate broker: a middle man or agent who buys and sells real estate for a company, firm, or individual on a commission basis. The broker does not have title to the property, but generally represents the owner.
  • REALTOR: a real estate agent or broker who is a member of the National Association of Realtors, and its local and state associations.
  • Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
  • Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages--like the FHA's 203(k)--allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
  • RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.
  • Restrictive covenants: private restrictions limiting the use of real property. Restrictive covenants are created by deed and may "run with the land," binding all subsequent purchasers of the land, or may be "personal" and binding only between the original seller and buyer. The determination whether a covenant runs with the land or is personal is governed by the language of the covenant, the intent of the parties, and the law in the state where the land is situated. Restrictive covenants that run with the land are encumbrances and may affect the value and marketability of title. Restrictive covenants may limit the density of buildings per acre, regulate size, style or price range of buildings to be erected, or prevent particular businesses from operating or minority groups from owning or occupying homes in a given area. (This latter discriminatory covenant is unconstitutional and has been declared unenforceable by the U.S. Supreme Court.)

S

  • Sales agreement: see Agreement of sale.
  • Settlement: another name for closing.
  • Special assessments: a special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc.
  • Special forbearance: a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
  • Special lien: a lien that binds a specified piece of property, unlike a general lien, which is levied against all one's assets. It creates a right to retain something of value belonging to another person as compensation for labor, material, or money expended in that person's behalf. In some localities it is called "particular" lien or "specific" lien. (See Lien.)
  • Special warranty deed: a deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property. In a special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property which has, or which might in the future, impair the grantee's title.
  • Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.
  • Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
  • Sweat equity: using labor to build or improve a property as part of the down payment

T

  • Tax: as applied to real estate, an enforced charge imposed on persons, property or income, to be used to support the state. The governing body in turn utilizes the funds in the best interest of the general public.
  • Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien.
  • Title insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
  • Title search or examination: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
  • Trustee: a party who is given legal responsibility to hold property in the best interest of or "for the benefit of" another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law. (See Deed of Trust.)
  • Truth-in-lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.

U

  • Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.

V

  • VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.

Z

  • Zoning ordinances: the acts of an authorized local government establishing building codes, and setting forth regulations for property land usage.

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