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Adjustable-Rate Mortgage
A mortgage loan in which the lender
may adjust the rate of interest according to some specific index
outside the control of the bank or savings and loan institution,
such as the interest rate on US Treasury bills or the average mortgage
rate. Adjustments are made regularly, usually at intervals of one,
three, or five years. In return for taking some of the risk of a
rise in interest rates, borrowers get lower rates at the beginning
of the ARM than they would if they took out a fixed rate mortgage.
Commonly abbreviated as ARM.
Adjustment Period
Frequency that the interest rate of an adjustable-rate mortgage
is repriced to the base rate. Example: For a one-year ARM, the adjustment
is made once a year, for a three-year ARM, the adjustment is made
every three years.
Amortization
For mortgage use, the term amortization refers to the reduction
of debt by regular payments of principal and interest sufficient
to pay off a loan by maturity.
Amortization Tables
Mathematical tables that shows how a mortgage or other loan
is gradually repaid by applying the appropriate amount of the payment
to the principal and interest.
Annual Percentage Rate (APR)
A figure that states the total yearly cost of a mortgage as
expressed by the actual rate of interest paid. The APR includes
the base interest rate, points, and any other add-on loan fees and
costs.
Appraisal Value
A professional opinion about the market value of the house you
want to buy (or already own if you're refinancing your loan). You
must pay your mortgage lender or broker to hire an appraiser, because
this opinion helps protect the lender from lending you money on
a home that's not worth the mortgage amount.
Base Rate
The underlying interest rate used as a benchmark, or index for
pricing variable rate mortgages.
Closing Costs
Costs addition to the down payment. Closing costs include such
expenses as points, an appraisal fee, a credit report fee, mortgage
interest for the period between the closing date and the first loan
payment, homeowners' insurance premium, title insurance, prorated
property tax, and recording and transferring charges.
Credit Report
A report that documents your history of repaying debt. It's
the main report lenders utilize to determine your creditworthiness.
Debit-to-income Ratio
Measures your future monthly housing expenses, which include
your proposed mortgage payments (debt), property tax, and insurance
in relation to your monthly income.
Down Payment
The part of the purchase price that the buyer pays in cash up
front, and does not finance with a mortgage. You can usually qualify
for the best available mortgage programs with a down payment of
20 percent of the property's value.
Equity
Refers to the difference between the market value of a home
and the amount the borrower owes on it. For example, if your home
is worth $400,000 and you have an outstanding mortgage of $200,000,
your equity is $200,000.
Escrow
The holding of important documents and money related to the
purchase/sale of real estate by a neutral third party prior to the
close of the transaction.
Flood Insurance
Insurance that home buyers in federally designated flood areas
must purchase in order to obtain a mortgage.
Homeowner's Insurance
A policy that protects your home. Mortgage lenders always require
that you have homeowner's insurance before funding your loan.
Index
A measure of the overall level of market interest rates that
the lender uses a reference to calculate the specific interest rate
on an adjustable-rate mortgage.
Initial Rate
The starting interest rate on an adjustable-rate mortgage loan,
which is often below market ARM rates. The intent of a low initial
rate is to assist homebuyers that may not otherwise qualify for
a mortgage loan.
Loan-to-value (LTV) Ratio
Ratio of money borrowed to fair market value, usually in reference
to real property.
Mortgage Broker
A person who can help you obtain a mortgage. Mortgage brokers
buy mortgages wholesale from lenders and sell them to buyers. A
mortgage broker will help you find the best rate available on the
market for your situation.
Points
Upfront fee charged by a lender, separate from interest but
designed to increase the overall yield to the lender. A point is
1% of the total principal amount of the loan. For example, on a
$200,000 mortgage loan, a charge of 3 points would equal $6,000.
Since points are considered a form of prepaid mortgage interest,
they are tax deductible, usually over the term of the loan, but
in some cases in a lump sum in the year they are paid.
Prepayment Penalty
A fee charged to borrowers for making additional payments (or
Payoff) on their
mortgage loan principal.
Prequalification
An informal process whereby mortgage brokers, based upon information
the potential borrower discloses about their financial situation,
provide an opinion about the money they may be able to borrow.
Preapproval
A detailed evaluation that mortgage brokers use to determine how
much money they may be able to borrow. The preapproval process reviews
the borrowers financial statements, credit and debts. A preapproval
letter strengthens the borrowers position when presenting an offer
to purchase, because it shows the seller the borrowers seriousness
and creditworthiness.
Private Mortgage Insurance (PMI)
Insurance that protects the lender in case a borrower defaults on
a mortgage.
* Required to loans with an LTV of greater
than 80%
Property Taxes
Yearly taxes (paid by the owner) assessed on a home. Property tax
annually averages 1 to 2 percent of the home's value.
Refinancing
Taking out a new mortgage loan to pay off an existing mortgage.
Tax Savings
The amount saved on taxes by itemizing deductions on income tax
returns. Mortgage interest and property taxes are tax deductible,
and therefore generate a tax shield.
Terms
The period of the loan expressed in years.
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