| ADJUSTABLE-RATE
MORTGAGE (ARM)
- a mortgage with an interest rate that changes periodically, according to an index that is
selected when the mortgage is issued. The initial interest rate is lower than that for fixed-rate
mortgages, but monthly payments can go up or down when the rate is adjusted.
ADJUSTMENT
INTERVAL - the period
of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment
intervals are one year, three and five years.
ANNUAL PERCENTAGE
RATE (APR) - a stated
interest rate that reflects all the financing costs of a mortgage. The APR includes points,
origination fees and other finance charges in addition to the interest on the mortgage, and
includes them all in a yearly interest rate. As a result, the APR is usually higher than the
interest rate alone. It also provides a benchmark for comparing different types of mortgages
based on the annual cost for each loan.
APPRAISAL
- an estimate of the value
of a property, made by a qualified professional called an appraiser.
BALLOON (PAYMENT)
MORTGAGE - usually
a short-term fixed-rate loan which involves small payments for a certain period of time and
one large payment for the remaining amount of the principal at a time specified in the contract.
BIWEEKLY MORTGAGE - a type of fixed-rate mortgage with
payments for half the usual monthly amount scheduled every two weeks. Because you make the
equivalent of 13 months of payments every year, the loan term is shortened from 30 years to
18 or 19 years, and total interest cost are substantially lower.
CAPS
- consumer safeguards for
adjustable-rate mortgages that limit the amount monthly payments can increase. An interest
rate cap limits the amount the interest can change, while a payment cap limits the increase
in monthly payment to a specific dollar amount.
CLOSING
- the meeting between
the buyer, seller and lender (or their agents) where the property and funds legally change
hands. Also called settlement.
CLOSING COSTS
- the costs and fees associated
with the official change in ownership of the property and with obtaining your mortgage that
are assessed at the closing or settlement. Closing costs include required certifications,
insurance, taxes and other fees, and typically total between 3 and 6 percent of the mortgage
amount.
CREDIT REPORT
- a report that documents
a borrower's credit history and current status. Borrowers can examine their own credit reports,
although most credit reporting companies charge a fee to provide a report.
DEBT-TO-INCOME
RATIO - the ratio,
expressed as a percentage, which results when a borrower's monthly payment obligation on long-term
debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income
(conventional loans).
DOWN PAYMENT - an amount paid in cash to the seller when
a home is purchased. The down payment is the difference between the purchase price and the
mortgage amount, and is traditionally 10 to 20 percent of the purchase price, although many
loans are now available with smaller down payments.
EQUITY
- the difference between
the fair market value and current indebtedness, also referred to as the owner's interest.
ESCROW
- a special account set up
by the lender in which money is held to pay for taxes and insurance. "Escrow" can
also refer to a third party who carries out the instructions of both the buyer and seller
to handle the paperwork at the settlement.
FHA (FEDERAL
HOUSING ADMINISTRATION) MORTGAGE
- a loan insured by the Federal Housing Administration. FHA mortgages require lower down payments
than conventional mortgages, and also feature less stringent income and financial requirements.
FIXED-RATE
MORTGAGE -
a mortgage with an interest rate that remains constant for the life of the loan. The most
common fixed-rate mortgage is repaid over a period of 30 years; 15 year fixed-rate mortgages
are also available.
INDEX
- an economic indicator,
usually a published interest rate, that determines changes in the interest rate of an ARM.
ARM rates are adjusted to reflect changes in the index. The margin is the amount a lender
adds to the index to establish the actual interest rate on an ARM.
INTEREST
- the sum paid for borrowing
money, which pays the lender's costs of doing business.
LENDER BUY-DOWN
MORTGAGE - a convertible
mortgage offering a discounted interest rate at the beginning of the loan that gradually increases
to an agreed-upon fixed-rate over the first few years of the loan. It provides lower initial
payments and a stable final monthly rate, but the final rate may be somewhat higher than on
a standard fixed-rate mortgage.
LOAN ORIGINATION
FEE - the fee charged
by a lender to prepare all the documents associated with your mortgage.
LOAN-TO-VALUE
RATIO - the relationship
between the amount of the mortgage loan and the appraised value of the property expressed
as a percentage.
MORTGAGE INSURANCE
- an insurance policy the
borrower buys to protect the lender from non-payment of the loan. Private mortgage insurance
policies are usually required if you make a down payment that is below 20% of the appraised
value of the home.
PITI (PRINCIPAL,
INTEREST, TAXES AND INSURANCE)
- the four components that (for most homeowners) are included in the monthly mortgage payment.
Principal and interest are the portions of the payment assigned to repay the mortgage itself;
taxes and insurance are paid by your lender into a special escrow account to pay for homeowners
insurance and property taxes.
POINTS
(LOAN DISCOUNT POINTS)
- prepaid interest on a mortgage that is usually paid at the time of closing. Each point is
equal to one percent of the total amount of a mortgage (one point on an $80,000 mortgage is
$800, or 1 percent of 80,000). Most lenders offer mortgages with several combinations of points
and interest rates; generally, the lower the interest rate, the more points you will pay at
settlement.
PRINCIPAL
- the amount of debt, not
including interest, left on a loan; also the face amount of the mortgage.
TITLE INSURANCE
- an insurance policy which
insures you against errors in the title search, essentially guaranteeing you and your lender's
financial interest in the property.
UNDERWRITING
- the process of deciding
whether to make a loan based on credit, employment, assets and other factors.
VA (DEPARTMENT
OF VETERANS AFFAIRS) MORTGAGE
- government insured loans guaranteed by the Department of Veterans Affairs, requiring very
low or no down payments and with generous requirements for qualification. They are available
only to veterans of the armed services, those currently on active duty or in the reserves,
and their spouses. |
