Adjustable-rate mortgage (ARM)
A mortgage or home equity loan in which
your interest rate and monthly payments may change periodically
during the life of the loan, based on the fluctuation of an
index. Lenders may charge a lower interest rate for the initial
period of the loan. Most ARMs have a rate cap that limits
the amount the interest rate can change, both in an adjustment
period, and over the life of the loan. Also called a variable-rate
mortgage.
Amortization
The gradual reduction in the principal amount owed on a debt. During the
earlier years, most of each payment is applied toward the
interest owed. During the final years of the loan, payment
amounts are applied almost exclusively to the remaining principal,
unless there has been negative amortization.
Amortization table
A time
table or schedule to give you a breakdown of your monthly
payments into principal and interest. You can use this schedule
to figure out the amount of principal you'll repay during
your mortgage term.
Amortization term
The amount
of time required to amortize (or pay off) the loan. The amortization
term is expressed in months. For example, for a 15-year fixed-rate
mortgage, the amortization term is 180 months.
Annual fee
An annual
amount you pay for having an open line of credit.
Annual adjustment cap
A limit
on how much the variable interest rate on a loan can increase
or decrease each year.
Annual percentage rate (APR)
The annual
cost of a loan to a borrower. Like an interest rate, the APR
is expressed as a percentage of the loan amount. Unlike an
interest rate, however, it includes other charges or fees
to reflect the total cost of the loan. The Federal Truth in
Lending Act requires that every consumer loan agreement disclose
the APR. Since all lenders must follow the same rules to ensure
the accuracy of the APR, borrowers can use the APR as a good
basis for comparing certain costs of loans.
Application fees
Non-refundable
fees paid when you apply for your loan. They may include charges
for property appraisal, a credit profile and so forth.
Appraisal or appraised value
An informed
estimate of the value of property. When made in connection
with an application for a loan secured by a home, it's usually
made by a professional appraiser. It's sometimes called a
property valuation.
Appraisal fee
The charge
for estimating the value of property.
Appreciation
An increase
in the value of property over time. Important factors in a
home's appreciation are its location and condition, and the
selling price of similar homes in the area. Appreciation increases
the amount of equity, which may also increase the amount you
can borrow for a home equity loan or line of credit. The opposite
of depreciation.
Asset
Property
or a possession of value that a lender may be willing to accept
as collateral to secure repayment of debt. For example, real
estate, stocks, mutual funds, cash and automobiles are all
assets.
Assumable
When you
sell your home, your buyer may be able to qualify to take
over your existing mortgage at your current rate. This can
be beneficial if interest rates have risen above the rate
you're currently paying on your mortgage. The lower-interest
rate benefit may make your home more affordable to prospective
homebuyers.
Available funds
The total
amount of funds available to you from your own funds and/or
other sources that can be used for your down payment and the
closing costs associated with a loan.
Balance sheet
A dated
financial statement (in table form) that shows your assets,
liabilities and net worth.
Balloon loan
A short-term
loan with smaller payments for a certain period of time, and
one or more large payments for the remaining principal amount,
due at a specified time.
Balloon payment
A lump-sum
payment, which is larger than your regular periodic payment,
that's paid at the end of your loan repayment period.
Bankruptcy
A proceeding
in federal court altering or eliminating an eligible individual's
obligations to repay some or all of his or her creditors.
A borrower may relieve debts by transferring his or her assets
to a trustee. Different chapters or types of bankruptcy exist.
If a person files bankruptcy, a record of the filing appears
on the borrower's credit report for up to 10 years.
Base rate
The underlying
interest rate used as a benchmark, or index, for pricing variable-rate
loans such as adjustable-rate mortgages, auto loans or credit
cards.
Basis point
An amount
equal to 1/100th of a percentage point. For example, a fee
calculated as 50 basis points of $200,000 would be 0.50% or
$1000.
Bi-weekly
Every
other week. Some loans offer a bi-weekly payment option, which
requires 26 half payments per year (amounting to one additional
full payment each year). This option allows you to pay your
loan off more quickly and to build equity faster. Sometimes
there are costs associated with choosing this option.
Blue Book value
Refers
to the Kelley Blue Book, a guide and Web site that lists suggested
values for new and used cars.
Breach
A violation
of any legal obligation or contract.
Broker
A third
party who helps arrange funding or negotiates a contract between
parties, but does not lend the money himself or herself.
Buydown
A buydown
is the prepayment by a lender or homebuilder of a portion
of the interest that will become due on your promissory note
during the buydown period, thereby reducing your monthly payments.
The buydown period may be one, two or three years, during
which time your monthly payments will increase annually, in
accordance with a predetermined schedule, ending with the
monthly payment specified in your note.
Cap
A limit
on how much a variable interest rate can increase. Many adjustable
rate mortgages have both annual (or semi-annual) rate caps
and lifetime caps. They limit the amount your payments can
increase in an adjustment period and over the life of the
loan.
Capitalized cost
The amount
financed under a lease agreement.
Closed-end lease
A lease
that predetermines what the specific value of the leased item
will be at the end of the lease, and the fees that may be
due at that time.
Closing
The time
and place at which all documents for your loan are signed,
dated and notarized. Also called a settlement.
Closing costs
Fees paid
at or prior to the closing of your loan. They may include
attorneys' fees, as well as fees for preparing and filing
a mortgage, and for taxes, title search, and insurance. They
include the expenses incurred in obtaining the loan and in
transferring the ownership of any collateral property from
the seller to the buyer. Generally closing costs range from
2% to 6% of the mortgage amount.
Co-borrower
An additional
person who assumes equal responsibility for repayment of a
loan and is fully obligated under the terms of the loan. This
person also has equal rights to the proceeds of the loan.
Collateral
An asset,
such as a car or a home, used for securing the repayment of
a loan. The borrower risks losing the asset if the loan is
not repaid.
Collision insurance
Auto insurance
that pays for repairing the damage to your car when you've
been in a collision with another auto.
Combined loan-to-value ratio (CLTV)
The ratio
between the unpaid principal amount of your first mortgage,
plus your home equity loan – or your credit limit in the case
of a line of credit – and the appraised value of your home.
Expressed as a percentage.
Commission
The fee
charged by a broker or agent for negotiating a real estate
or loan transaction. A broker commission is generally a percentage
of the price of the property or loan.
Comprehensive insurance
Auto insurance
that pays for repairing the damage sustained to your car in
a non-collision accident. For example, theft, vandalism or
bad weather.
Condominium or condo
A building
or development with many housing units where each person owns
his or her individual unit and shares an interest in the common
areas and facilities of the entire project. You go through
the same process of buying a condo as you do when buying a
house, and have a deed to and a mortgage on your particular
unit. You also pay property taxes on your unit.
Conforming loan
A mortgage
loan that has the standard features as defined by and is eligible
for sale to Fannie Mae and Freddie Mac.
Contingency
A specified
condition that the sales contract requires must be satisfied
before the home sale can occur. When buying a home, the two
most common contingencies are that the house must pass inspection
and that the borrower must be approved for a loan.
Contract
An oral or written agreement to do, or not to do, a certain thing.
Co-signer
A second
person who signs your loan and assumes equal responsibility
for payment of the loan but receives no benefit from the loan
proceeds.
Cost benefit analysis
A dollar-value
analysis that compares the benefits of owning a home to the
costs. Some home ownership benefits may include: tax savings
you may receive on the mortgage interest and property taxes
you pay; and the appreciation that may occur in the value
of your home over time, building your home equity. Home ownership
costs may include: interest you pay on the loan; closing costs,
including any mortgage points; property taxes and homeowner's
insurance premiums; private mortgage insurance premiums; and
maintenance costs including those associated with normal wear
and tear and weathering.
Credit
An arrangement
in which a borrower receives something of value in exchange
for a promise to repay the lender at a later date.
Credit reporting agency or credit bureau
An organization
that gathers, records, updates and stores financial and public
records of individuals who have been granted credit and provides
this information to lenders and other authorized users for
a fee.
Credit history
A record
of an individual's debts and payment habits over time. It
helps a lender determine whether or not a potential borrower
is a good business risk.
Credit limit
The maximum
amount you can borrow under a line of credit.
Credit report
A record
of an individual's debts and payment habits. It helps a lender
determine whether or not a potential borrower is a good business
risk.
Credit score
A number,
rating the quality of an individual's credit. Lenders calculate
this number, often with the assistance of computer systems,
as part of the process of assigning rates and terms to the
loans they make.
Creditor
A person
or business from whom you borrow or to whom you owe money.
Creditworthiness
The likely
ability of a borrower to repay debt.
Dealer charges
Charges
for features sold separately by an auto dealer, such as rustproofing,
undercoating, extended warranties or additional options.
Dealer holdback
The difference
between the amount on the invoice and what an auto dealer
pays the manufacturer. This difference can be 2% to 3% of
the car's MSRP.
Dealer incentives
Reduced-price
programs that auto manufacturers can offer their dealers to
boost sales of less popular models or reduce inventories.
The dealers can then decide whether to pass these savings
on to their customers.
Dealer invoice
The amount
that auto manufacturers charge dealers for new cars, including
the options.
Dealer sticker price
The Monroney
sticker price plus the suggested mark-up for features the
dealer installs himself.
Debt
An amount
of money owed by one person, company, organization or other
entity to another.
Debt consolidation
A single
loan to pay off multiple debts, usually over a longer term.
This is a popular use of home equity loan or line of credit.
Debt-to-income ratio
The percentage
of your total debt compared to your total income before taxes.
Many lenders like to see your debt (including your mortgage
payments) be no more than 36% of your total income.
Deed (warranty or quit-claim)
A document
that legally transfers ownership of real estate from a seller
to a buyer. It's delivered to the buyer at closing. Before
making a loan, a lender will usually require a title search
or a title report to make sure the real estate that is to
secure the loan is legally owned by the borrower.
Default
Failure
to make mortgage payments on time or to meet other terms of
a loan. Default can lead to foreclosure.
Delinquency
Failure
to make payments on time.
Depreciation
A decline
in the value of property due to wear and tear or any other
reason. The opposite of appreciation.
Destination charge
The actual
costs the dealer pays for shipping and delivering a new car.
The dealer then charges you this fee, with no mark-up.
Disclosures
Information given to consumers about their loans.
Discount points
Typically,
an amount paid at closing to the lender in conjunction with
a mortgage loan in order to lower the interest rate. One discount
point equals one percentage point of the loan amount.
Document preparation fee
Fee required
to cover the cost of preparing the necessary documents for
closing.
Document drawn date
The date
on which your legal documents are prepared for closing.
Down payment
The amount
of cash you pay toward the purchase of your home to make up
the difference between the purchase price and your mortgage
loan. Down payments often range between 5% and 20% of the
sales price depending on many factors, including your loan,
your lender, your credit history and so forth.
Draw
The process
of obtaining an advance against your available credit under
your line of credit.
Draw period
The period
during which a borrower can obtain advances from the available
line of credit. At the end of the draw period, borrowers may
be able to renew the credit line or may be required to pay
the outstanding balance in full or in monthly installments.
Equal Credit Opportunity Act (ECOA)
A federal
law that requires lenders and other creditors to make credit
available without discrimination based on race, color, religion,
national origin, age, sex, marital status or receipt of income
from public assistance programs.
Equity
The difference
between the fair market value (appraised value) of your home
and your outstanding mortgage balances and other liens.
Escrow
The process
of placing an amount of money and documents with a neutral
third party, called an escrow agent, who's given the authority
to deposit, disburse and distribute to the proper parties
all the money and documents involved in a real estate transaction.
The purpose is to protect both the buyer and seller in the
transaction from the other side's unauthorized use of funds
and ensures an arm's-length transaction between both sides.
Also commonly
used to mean an escrow account or impound account, required
by many lenders and held by the lender during the term of
the loan. This deposit is used to hold the borrower's advance
payments toward insurance and property taxes until they become
due.
Fair Credit Reporting Act (FCRA)
Congress
passed this act to give consumers certain rights when dealing
with consumer reporting agencies, or CRAs. CRAs are required
to provide accurate credit histories to authorized businesses
for use in evaluating applications for insurance, employment,
credit or loans.
Fair market value
The likely
selling price of a home between a willing buyer and a willing
seller on the open market. In a mortgage or a home equity
loan, the fair market value is usually determined by an appraisal.
Fannie Mae
Federal
National Mortgage Association, a government-sponsored enterprise
which buys and securitizes mortgages for re-sale in the secondary
market.
FHA
An acronym
for Federal Housing Administration, which is an agency of
the Department of Housing and Urban Development. The FHA provides
mortgage insurance for certain residential mortgages. It sets
standards for underwriting these mortgages and for construction
of homes secured by these mortgages.
FICO®
An acronym
for Fair Isaac Company, Inc., which develops the mathematical
formulas used to produce credit scores for assessing credit
risk.
Finance charge
The finance
charge is the cost of consumer credit expressed as a dollar
amount. It includes the amount of interest you will pay during
the terms of the loan, origination points and certain other
items. Some closing costs are not treated as finance charges.
First mortgage
A mortgage
that is the senior lien against a property.
Fixed-rate option or fixed-rate loan option
An option
available on home equity lines of credit allowing borrowers
to fix the payments and interest rate on all or a portion
of their outstanding principal balance for a specific term.
Customers may be charged a fee for this privilege.
Fixed-rate mortgage
A home
loan with a predetermined fixed interest rate for the entire
term of your loan. This means that the interest rate will
never change for as long as you have the loan.
Flood certification
A determination
by a reputable source about whether property is located within
a special flood hazard zone.
Flood insurance
Insurance
that protects against loss due to floods. When available,
this type of insurance is required by law when a property
is located within a special flood hazard zone.
Foreclosure
A legal
procedure in which property securing a defaulted loan is sold
by the lender in order to repay a borrower's loan. The amount
paid by a buyer at the foreclosure may not be enough to fully
repay the loan and the borrower may continue to owe the lender
the difference.
Freddie Mac
A government-sponsored
enterprise which buys and securitizes mortgages for re-sale
in the secondary market.
Funding date
The date
on which the proceeds from a loan are available to, or disbursed
for the benefit of, the borrowers.
GAP insurance
An acronym
for guaranteed auto protection insurance.
Gift funds
The funds
a borrower receives that do not have to be paid back.
Good
faith estimate (GFE)
An itemized,
detailed list of certain estimated costs associated with a
home loan that the lender is required to provide to the borrower
within three business days of the application.
Gross annual income
The total
amount of income from all sources (not just salary) that a
borrower receives per year before deductions.
Guaranteed auto protection (GAP) insurance
Intended
to pay all or part of the amount you would owe due to early
termination of a lease agreement. Such early termination may
occur when a car is stolen or seriously damaged in an accident.
However, the auto insurer's payment may not be enough to pay
off the lease balance and any early-termination penalties.
Home equity line of credit (HELOC)
A line
of credit secured by the equity in a borrower's residence.
It can be used for home improvements, debt consolidation and
other major purchases or expenses. Interest on these loans
may be tax deductible. (Consult a tax advisor about tax deductibility
of interest.) At closing, a credit limit is established. In
most cases, the borrower can access the line of credit by
a variety of access devices, such as convenience checks, debit
cards and credit cards.
Home equity loan
An installment
loan secured by the equity in a borrower's residence. It can
be used for home improvements, debt consolidation and other
major purchases or expenses. Interest on these loans may be
tax deductible. (Consult a tax advisor regarding tax deductibility
of interest.) On the funding date, all of the principal is
advanced for the benefit of the borrower(s).
Home inspection
An inspection
of the condition of a property. It's conducted by a third
party who knows what to look for, including all major appliances
and structural elements. If an inspector finds something wrong,
and your sales contract allows you to, you can request that
the seller pay for the repairs. If the seller refuses, and
your sales contract allows you to, you may not have to proceed
with the purchase of the home.
Homeowners' association
An organization
of property owners that administers the rules and upholds
the covenants of a subdivision, development or condominium
complex.
Homeowners' insurance
Insurance
to protect your home against damage from fire, hurricanes
and other catastrophes. Usually, homeowners' insurance also
covers you against theft and vandalism, as well as personal
liability in case someone is hurt or injured on your property.
A lender will likely require you to name it as a payee under
the insurance if you need to make a claim.
HUD
An acronym
for the U.S. Department of Housing and Urban Development.
HUD is a governmental agency responsible for the implementation
and administration of housing and urban development programs.
Impound account or escrow account
An account
specifically set up by a lender to hold funds that are set
aside for the payment of property taxes and insurance. These
funds are held in escrow until disbursed on behalf of the
borrower to the appropriate parties.
Index
When used
in a note or credit agreement, the measurement used to decide
how much the annual percentage rate will change at the beginning
of each adjustment period. Generally, the index plus margin
equals the new rate that will be charged, subject to any caps.
Different lenders use different index rates (cost of funds
index, prime rate and so forth).
Inflation rate
The increase
in price of consumer goods, usually expressed as a percentage
over a specific period of time.
Initial rate
The starting
interest rate. Some people call this a teaser rate, because
it gives you low interest and low monthly payments at the
beginning, but may adjust up at the next adjustment period
(it will usually adjust even if the index doesn't go up, since
it's lower than index plus margin for the initial period).
Interest
A charge
paid for borrowing money.
Interest-only payments
Some lenders
permit you to pay only the interest due on a loan for a portion
of the loan term, which lowers your periodic payment, but
does not decrease your principal balance on the loan. See
balloon loan and balloon payment.
Interest rate
Cost for
the use of a loan, usually expressed as a percentage of the
loan, paid over a specific period of time. The interest rate
does not include fees charged for the loan. See annual percentage
rate.
Interest rate cap
A limit
on how much the variable interest rate can increase at any
one time. Many real estate loans have both annual (or semi-annual)
caps and lifetime caps, which limit the amount your payments
can increase in an adjustment period and over the life of
the loan.
Investment property
Property
that is purchased to generate rental income, or to be sold
once it's appreciated in value.
Invoice price
The amount
that auto manufacturers charge dealers for new cars, including
the options. Also called dealer invoice.
