- Adjustable-rate
mortgage (ARM):
A mortgage in which
the interest rate
increases or decreases
over the life of the
loan based on market
conditions, resulting
in possible changes
in monthly payments.
Some plans have rate
or interest ``caps''
that limit the amount
your interest rate
may change. This loan,
which has many variations,
generally carries
a lower initial rate
than a fixed-rate
loan because the borrower
assumes the risks
of the rising, or
falling, market. It
becomes more popular
when rates rise.
- Amortization:
The gradual repayment
of debt by means of
systematic installments
of principal and interest
(monthly payments)
over a set period
(term of the loan).
At the end of the
period, there is a
zero balance. Interest
forms the bulk of
the payment in the
early years of the
loan.
- Annual percentage
rate: The
cost of your loan,
expressed as an annual
percentage. Lenders
are required by law
to provide you with
the APR calculation.
The lender must calculate
all the financing
charges paid by the
borrower, including
the interest paid
on the loan, the loan
origination fee and
mortgage insurance
you may be required
to pay.
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- Assumable
loan: The
buyer takes over the
seller's original,
usually below-market-rate
mortgage. Fixed-rate
loans generally are
not assumable, while
most adjustable-rate
packages are.
- Buydown:
A sum of money sufficient
to ``buy'' or obtain
a lower-than-market
rate from the lender.
It can be viewed as
prepaid interest in
exchange for lower monthly
payments. It is similar
to discount points on
a government loan.
- Closing
costs: All
costs, other than
the loan-origination
fee, paid by seller
or buyer when the
loan is finalized.
Examples include lawyers'
fees, title-search
fee, title-insurance
premiums, deed recording
and transfer tax.
- Commitment:
A promise by the lender
to make mortgage funds
available for the
express purpose of
financing a specific
property. Such a promise
is conditional based
on the buyer having
provided accurate
qualifying information,
as well as having
satisfied all underwriting
requirements.
- Contract
(real-estate contract):
The seller retains
the original mortgage
and the buyer does
not get title to the
property until the
loan is paid off.
The buyer is given
possession of the
property and is said
to have ``equitable''
title to the property,
while the seller retains
legal title. This
is a seller-financing
vehicle sometimes
known as ``carrying
the contract'' or
``carrying the paper.''
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- Conventional
mortgage:
A mortgage in which
the interest rate
and payments remain
constant over the
life of the loan.
- Convertible
loan: In
the case of an adjustable-rate
mortgage (ARM), the
loan, at some future
specified time, can
be changed to a conventional
fixed-rate loan. This
recently has become
the most popular option
in adjustable loans.
- Deed of
trust or mortgage:
Establishes the lender's
legal status in the
property.
- Depreciation:
Decrease in the value
of property over a
period of time because
of use, wear and tear
or obsolescence.
- Disclosure
statement:
Detailed explanation
of the specific loan
for which you are
applying. It is a
vehicle used to satisfy
questions about the
conditions of the
mortgage contract.
- Discount:
A reduction in the
interest rate offered
by the lender, usually
for an additional
fee referred to as
discount points. It
is a form of loan
fee, sometimes called
a buydown.
- Earnest-money
agreement:
Also known as a sales
contract, it is a written
agreement between the
purchaser and seller
specifying all terms
and conditions of the
sale. This ``good faith''
agreement is accompanied
by a sum of money (earnest
money) given to bind
the sale.
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- Escrow:
Process performed
by a third party that
makes certain the
interests of the buyer,
seller and lender
are satisfied.
- Equity:
The interest or value
that an owner has
in real estate, over
and above the mortgage
or debt against it.
- Income:
As used on loan applications,
this is any kind of
income that can be verified
as having existed over
at least the past two
years and will continue
into the foreseeable
future.
- LAMA:
This relatively new
and marketed index
means LIBOR Annual
Monthly Average and
is designed to reduce
the volatility normally
associated with LIBOR-based
indices. Fannie Mae
has been publishing
a one-month LIBOR
rate since 1989 but
the composite average
index is a new tool.
LAMA reacts slower
to market conditions.
- LIBOR:
The London InterBank
Offered Rate is an
average of what international
banks charge each
other for large-volume
loans. The index responds
very quickly to market
conditions and is
calculated for a variety
of loan adjustments
- one month, three
months, six months,
one year, etc.
- Loan-to-value
ratio: The
relationship of the
loan amount to the
appraised value of
the property or the
sale price, whichever
is lower. This ratio
usually is expressed
as a percentage.
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- Lien:
The right given by
law to satisfy debt.
A legal claim of one
person or company
on the property of
another for purposes
of securing a debt.
- Mortgage insurance:
Lenders require this
when the borrower makes
a low down payment,
usually an amount less
than 20 percent of the
purchase price. Not
to be confused with
mortgage life insurance
which pays off the mortgage
in the event the borrower
dies.
- Negative
amortization:
Occurs when the monthly
payment is not enough
to pay interest on
your loan. The unpaid
interest is added
to the unpaid balance
of the loan. Instead
of reducing the amount
you owe, negative
amortization means
you owe more than
you initially borrowed.
Usually occurs only
on certain adjustable-rate
mortgages.
- Note rate:
The interest rate
stated in the legal
document (note) used
as evidence of the
borrower's debt to
the lender. The document
also describes how
the loan will be repaid.
- Origination
fee: Fee charged
by the lender to process
the loan application
and underwrite the loan.
It is usually 1 percent
to 3 percent of the
loan amount.
- Points:
The amount equal to
1 percent of the principal
amount of the loan.
For example, if the
loan is $50,000, a point
would be $500. Points
are charged by the lender
to increase the yield
on a loan to make it
comparable with other
types of investments.
Once only used with
government loans, points
are now synonymous with
"loan fee."
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- Rate lock-in:
A guarantee that the
interest rate will
remain the same for
a specified period
of time. Whether the
loan's interest rate
index rises or falls
during that period,
the borrower pays
the rate that was
current at the time
of the lock-in agreement.
- Replacement
cost: The
cost of replacing
property without deduction
for depreciation.
- Second mortgage:
A mortgage placed
on a property that
has second claim (or
secondary rights of
foreclosure) to a
first mortgage on
that property.
- Secondary
market: Investors
who purchase loans
from lending institutions,
providing those institutions
with a secondary source
of funds other than
deposits from which
the institutions can
offer more loans.
- Title insurance:
A policy that insures
current ownership
of the property regardless
of previous claims
against the property,
and insures the lender's
claim on the property
resulting from the
loan.
- Treasury
Average Index:
The 12-month average
of monthly yields
on actively traded
United States Treasury
Securities, adjusted
to a constant maturity
of one year. Reacts
slower in fluctuating
markets.
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- Underwriting:
A series of criteria
used by the lender
to determine whether
a loan application
should be approved
or denied.
- Wraparound
mortgage: The
seller keeps the original
mortgage. The buyer
makes payments to the
seller, who forwards
a portion to the lender
holding the original
mortgage.
- 11th District
Cost of Funds (COFI):
This is the monthly
average cost of funds
of member associations
of the Federal Home
Loan Bank of San Francisco.
This reacts more slowly
in fluctuating markets.
Popular recently because
the faster reacting
1-year Treasury has
shot up. The COFI
could continue up
when others start
down.
- 6-Month
Certificate of Deposit
(CD): This
is the weekly average
of the secondary mark
interest rates paid
on six-month negotiable
Certificates of Deposit.
The CD index is generally
considered to react
quickly to changes
in the market. Sometimes
used as a lender's
in-house or "portfolio"
product.
-1-Year Treasury
(1-year T-Bill):
This index, sometimes
known as a "spot"
index, is the weekly
average yield on United
States Securities
adjusted to a constant
maturity of one year.
This index generally
reacts more slowly
than the CD index,
but faster than the
Treasury Average.
