hese are some of the top used, and most frequent, terms and there definitions that you may hear while buying a home, refinancing your home or looking to obtain a mortgage.
A 3/1 ARM is an adjustable-rate mortgage, or ARM, that has an initial interest rate for the first three years, and thereafter adjusts each year. Each annual rate adjustment is based on (or “indexed to”) another rate — often the yield on a Treasury note. The rate can only change within limits, by a specified amount each year, and a specified amount over the life of the loan
3/1 interest-only ARM
A 3/1 interest-only ARM is an adjustable rate mortgage in which none of the payments go toward retiring principal for the first three years.
A 30-year fixed mortgage is a loan that has an interest rate that stays the same for the 30-year term of the loan.
A 5/1 ARM is an adjustable-rate mortgage (ARM) that has an initial interest rate for five years, and thereafter has an adjustment interval of one year. The adjustment is based on (or “indexed to”) another rate, often the yield on a Treasury note.
5/1 interest-only ARM
A 5/1 interest-only ARM is an adjustable rate mortgage in which none of the payments go toward retiring principal for the first five years. Thereafter, it becomes an amortizing mortgage, with payments going toward both principal and interest, and it has an adjustment interval of one year. The adjustment is based on (or “indexed to”) another rate, often the yield on a Treasury note.
A 7/1 ARM is an adjustable-rate mortgage (ARM) that has an initial interest rate for seven years, and thereafter has an adjustment interval of one year. The adjustment is based on (or “indexed to”) another rate, often the yield on a Treasury note.
20-year fixed mortgage
A 20-year fixed mortgage is a loan that has an interest rate that stays the same for the 20-year term of the loan. The principal amount is reduced, slowly at first, and then at an accelerating pace, over the life of the loan.
A 15-year fixed mortgage has an interest rate that stays the same for the 15-year life of the loan.
10-year fixed mortgage
A 10-year fixed mortgage is a loan that has an interest rate that stays the same for the 10-year term of the loan. The principal amount is reduced, slowly at first, and then at an accelerating pace, over the life of the loan.
A 1-year ARM is an adjustable-rate mortgage (ARM) that has an initial interest rate for one year, and thereafter has an adjustment interval of one year. The adjustment is based on a comparison of interest caps and the indexed rate.
1 Month LIBOR Rate
LIBOR stands for London Inter Bank Offer Rate. It’s the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate.
$30,000 home equity line of credit
A $30,000 home equity line of credit is an open-ended loan, paid as revolving debt, that is backed by the portion of the home’s value that the borrower owns outright. Interest paid on a home equity line of credit is usually tax deductible.
Abstract of Title
A written history of all the transactions that bear on the title to a specific piece of land. An abstract of title covers the time from when the property was first sold to the present. Used by the title company to produce a title binder.
A combination of an 80 percent loan-to-value first mortgage, a 10 percent home equity loan and a 10 percent down payment. The loans can be used to eliminate the need for private mortgage insurance. Alternatively, a buyer of an expensive home can use one to eliminate the need for a jumbo mortgage by reducing the first mortgage to the conventional limit.
The payment of a debt in installments over an agreed-upon period, during which principal and interest are paid off.
The principal that is financed. It could include the cost of the purchase and other items rolled into the payments.
A detailed table showing the amortization of a loan which includes the beginning principal amount, period payments, the interest portion of each payment, the principal reduction portion each payment, and the ending balance.
Annual percentage rate (APR)
A yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans. In mortgages, it is the interest rate of a mortgage when taking into account the interest, mortgage insurance, and certain closing costs including points paid at closing. There is no APR in an automobile lease; instead, the cost of money is expressed as the money factor.
What the lender charges to process the document in which a prospective borrower details his or her financial situation to qualify for a loan.
An estimate of market value placed on all real property and mobile homes. There are two kinds of appraisals: mass appraisal, in which a community is valued for tax purposes; and fee appraisal, in which one property is appraised, often in comparison with other properties. Each is accomplished under a different set of rules and guidelines.
A loan in which the payments aren’t set up to repay the loan in full by the end of the term. At the end comes the balloon payment — one that is larger than the other, periodic payments and pays off the remaining principal.
A legal proceeding that protects a debtor from legal action by some creditors. There are two basic ways of filing for personal bankruptcy. A Chapter 7 bankruptcy declaration gets rid of all debts (except some taxes and maybe alimony payments); Chapter 13 allows a borrower with a steady income to pay off bills over a 36- to 60-month period.
One one-hundredth of a percentage point. The difference between 8.04 percent and 8.05 percent is one basis point.
A mortgage that schedules payments every two weeks instead of the standard monthly payment. The 26 biweekly payments are each equal to one-half of the monthly payment. The result for the borrower is a substantial reduction in interest payments because the mortgage is paid off sooner.
The process of trading money for a lower mortgage rate. The borrower “buys down” the interest rate on a mortgage by paying discount points up front. It can also be a mortgage in which an initial lump-sum payment is made to temporarily reduce a borrower’s monthly payments during the first few years of a mortgage.
The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)
The chapter of the Bankruptcy Code providing for “liquidation,” i.e., the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors.
A reorganization bankruptcy, usually involving a corporation or partnership. (A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in Chapter 11.)
Expenses incurred by buyers and sellers when transferring ownership of property. Closing costs include lender fees, title charges, government recording fees, escrow and pre-paid items.
Combined loan-to-value ratio. A person’s overall mortgage debt load, expressed as a percentage of the home’s fair market value. Someone with a $50,000 first mortgage and a $20,000 home equity loan secured against a $100,000 house would have a CLTV ratio of 70 percent.
Comparables or Comps
Refers to “comparable properties,” which are used for comparative purposes in the appraisal process. Comps are recently sold properties that are similar in size, location and amenities to the home for sale. Comps help an appraiser determine the fair market value of a property.
Interest that is determined by adding the interest earned in the current period to the principal and computing the next period’s interest on this “compounded” total amount.
A mortgage that meets the requirements to be eligible for purchase or securitization by one of the government-sponsored enterprises such as Fannie Mae, Freddie Mac and Ginnie Mae. Requirements include size of the loan, type and age.
Consumer Credit Counseling Service
A service that offers counseling about how to work out a realistic budget and debt repayment plan and work with creditors. The goal is to ensure that debts are paid back over time.
Contract for Deed
An agreement for sale of property in which the buyer takes possession while making payments, but the seller holds title until full payment is made. Also called a land contract.
A judgment of someone’s ability to repay debts, based on current and projected income and history of payment of past debts. Sometimes expressed as a number called a credit score.
A number, roughly between 300 and 800, that reflects the credit history detailed by a person’s credit report. Lenders calculate this number with the assistance of computer systems as part of the process of assigning rates and terms to the loans they make.
The percentage of before-tax earnings that are spent to pay off loans for obligations such as auto loans, student loans and credit card balances. Lenders look at two ratios. The front-end ratio is the percentage of monthly before-tax earnings that are spent on house payments (including principal, interest, taxes and insurance). In the back-end ratio, the borrower’s other debts are factored in.
Property that is in poor condition, or whose owner is in poor financial condition.
The final mortgage on a property, as opposed to a construction or other interim loan.
An account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.
The legal process by which a homeowner in default on a mortgage is deprived of interest in the property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
Full Income Verification
A requirement for fully documented proof of income; loans of this type usually offer lower interest rates than no-income or “no-doc” verification loans.
Good Faith Estimate
Often called a GFE. A written estimate of expected closing costs that a lender must provide a prospective homebuyer within three days of the homeowner submitting a mortgage loan application. Brokers and lenders are required by law to make as accurate an estimate as they can.
An acronym for home equity line of credit.
High-LTV equity loan
A home equity loan that creates a total loan-to-value ratio of up to 125 percent or more. When the total principal of loans leaves homeowners with debt that exceeds the fair market value of the home, the interest paid on the portion of the loan above that value may not be tax deductible.
The sum of the published index plus the margin. For example, if the index is 9 percent and the margin 2.75 percent, the indexed rate is 11.75 percent.
The amount charged per year on a personal or home loan. The rate varies according to the type of loan. Or, the percentage of interest paid for money in deposit accounts, without regard to compounding, shown as an annual figure.
An advance of money in which the installments pay only the interest that accumulates on the loan balance. The loan balance does not decrease with the payments. Usually the interest-only payments last for a limited period, after which payments rise and the borrower begins paying principal in addition to interest.
A financing option that allows a potential homebuyer to lease a property with the option to buy. Often constructed so the monthly rent payment covers the owner’s first mortgage payment, plus an additional amount as a savings deposit to accumulate cash for a down payment. A seller may agree to a lease-purchase option if the housing market is saturated and the seller is having difficult selling the property.
LIBOR stands for London Interbank Offered Rate. It’s the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate. It’s an index that is used to set the cost of various variable-rate loans, including credit cards and adjustable-rate mortgages.
Loan Origination Fees
The cost to obtain a loan that is paid to the originating lender or broker.
Loan Processing Fee
A charge levied by a lender for accepting a loan application and gathering the supporting paperwork.
Loan-to-Value Ratio (LTV)
The percentage of the home’s price that is paid for by a mortgage. On a $100,000 house, if the buyer makes a $20,000 down payment and borrows $80,000, the mortgage is 80 percent of the price of the house. Therefore, the loan-to-value ratio is 80. When refinancing a mortgage, the loan-to-value ratio is computed using the appraised value of the home, not the sale price.
A lender’s guarantee that the mortgage rate quoted will not change for a specific period. The borrower wants the lock to stay in effect until closing.
The date on which the principal balance of a loan becomes due and payable. It also marks the date when a bond pays off its principal.
Merged Credit Report
A summary of one’s credit history from the big three credit bureaus: Equifax, Experian and Trans Union.
Monthly Periodic Rate
The interest rate factor used to calculate the interest charges on a monthly basis. The factor equals the yearly rate divided by 12. See periodic rate.
Short for “no-documentation loan.” A mortgage in which the applicant provides a minimum of information — name, address, Social Security number (so credit reports can be pulled), and contact information for an employer, if there is one. The underwriter decides on the loan based on the applicant’s credit history, the appraised value of the house and size of down payment.
Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.
Interest that is charged daily; usually refers to the partial month’s interest that the buyer pays on the mortgage covering the period from the day of closing to the end of the month.
Acronym for the elements of a mortgage payment: principal, interest, taxes and insurance.
Private mortgage insurance. A policy that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Although PMI protects the lender, it is paid monthly by the borrower. Private mortgage insurance usually is required if the down payment is less than 20 percent of the sale price.
A point equals 1 percent of a mortgage or other loan. Some lenders charge “origination points” to cover expenses of making a loan. Some borrowers pay “discount points” to reduce the loan”s interest rate.
Interest that a borrower pays before it is due, usually to save taxes.
A lender’s charge to the borrower for paying off the loan before the end of the term.
The interest rate a bank charges its best or “prime” customers. Each bank will quote a prime lending rate. Many institutions quote prime rates established by large money center commercial banks. There is also a prime rate average listed in the Wall Street Journal that is an average of the largest commercial banks. The rate given to consumers on their loans is often based as the prime rate plus a certain percentage, which represents the lender’s assessment of the risk in lending, plus its profit margin.
A home loan that a borrower obtains to buy property, using the property as collateral for the loan.
A document that transfers the grantor’s interest in a title to property and is filed with a county recorder. It often is used among family members and can be used to clear up a gap in the chain of title.
Permanent, nonmovable property, such as land and buildings.
The illegal practice of lenders and insurance companies to deny policies, loans and other services to people because of their neighborhood or ethnicity.
A rule, enforced by the Federal Reserve Board and implementing the Truth-in-Lending Act that requires lenders to disclose all credit-related costs including the annual percentage rate.
Cancellation of a contract by agreement of the parties.
The Real Estate Settlement Procedures Act. A consumer protection law that requires lenders to give homebuyers advance notice of closing costs, which are payable at the closing or settlement meeting. It outlaws kickbacks and illegal markups in costs.
A line of credit that does not have a specified repayment schedule but may require a minimum payment to cover interest and contribute to paying off principal. Typical of credit card loans, checking account cash reserve or overdraft accounts that have pre-approved lines of credit.
Right of Rescission
A provision of the federal Truth-in-Lending Act that allows a borrower to change his or her mind and cancel a loan within three days.
Seller Carry Back
A form of financing in which the seller of a property accepts a down payment and agrees to accept payments until the property is paid for.
Simple Interest Loan
A method of allocating the monthly payment between interest and principal. The interest charged is determined by the unpaid principal balance on the loan, the interest rate, and the number of days since the last payment. The rest of the payment goes to the principal. Making early payments or additional payments will reduce the loan’s principal and cut the total interest paid over the life of the loan.
Sub Prime Borrower
A borrower with a less-than-perfect credit report due to late payments or a default on debt payments. Lenders often grade them based on the severity of past credit problems, with categories ranging from “A-” on down to “D” or lower.
An expense that governments allow you to subtract from your income before computing your income tax. People who don’t take the standard deduction on federal income taxes can deduct the costs of mortgage interest and some loan points and property taxes.
Home loan in which the interest rate is changed periodically based on a standard financial index. Also called an adjustable-rate mortgage.