Amortizing loan
Monthly payments are large enough to pay
interest and reduce the principal on your mortgage.
Annual membership or maintenance
fee
An annual charge for having the line of
credit available. Charged regardless of whether or not the line is used.
Annual percentage rate (APR)
A measure of the cost of credit, expressed
as a yearly rate. It
includes interest as well as points, broker fees, and certain other
credit charges that the borrower is required to pay. Because all
lenders follow the same rules when calculating the APR, it provides
consumers with a good basis for comparing the cost of loans, including
mortgages, over the term of the loan.
Application fee
Fees paid when an application is submitted.
May include charges for property appraisal and a credit report.
Balloon payment
A lump-sum payment that may be required
when the mortgage ends.
Buydown
When the seller pays an amount to the
lender so that the lender can give you a lower rate and lower payments,
usually for an initial period in an ARM.
The seller may increase the sales price to cover the cost of the
buydown. Buydowns can occur in all types of mortgages, not just ARMs.
Closing or settlement costs
May include application fees; title
examination, abstract of title, title insurance, and property survey
fees; fees for preparing deeds, mortgages, and settlement documents;
attorneys’ fees; recording fees; and notary, appraisal, and credit
report fees. Under the Real Estate Settlement Procedures Act, the
borrower receives a good faith estimate of closing costs within three
days of application. The good faith estimate lists each expected cost
either as an amount or a range.
Conventional loans
Mortgage loans other than those insured or
guaranteed by a government agency such as the FHA
(Federal Housing Administration), the VA (Veterans Administration), or
the Rural Development Services (formally known as Farmers Home
Administration, or FmHA).
Conversion clause
A provision in some ARMs that allows you to
change the ARM to a fixed-rate loan at some point during the term.
Conversion is usually allowed at the end of the first adjustment
period. At the time of the conversion, the new fixed rate is generally
set at one of the rates then prevailing for fixed-rate mortgages. The
conversion feature may be available at extra cost.
Credit limit
The maximum amount that may be borrowed
under the home equity plan.
Discount
In an ARM with an initial rate discount,
the lender gives up a number of percentage points in interest to give
you a lower rate and lower payments for part of the mortgage term
(usually for one year or less). After the discount period, the ARM rate
will probably go up depending on the index rate.
Equity
The difference between the fair market value of the home and the
outstanding mortgage balance.
Escrow
Holding of money or documents by a neutral
or third party before closing. It can also be an account held by the
lender (or servicer) into which a homeowner pays money for taxes and
insurance.
The change--increase or decrease--you
expect at the first adjustment period. This amount is likely to be
between -3 and +3. If you think interest rates will not change, enter 0
in this box. Some mortgages limit this amount to 2 percentage points
for each adjustment period and to 6 to 8 percentage points over the
life of the loan (see Interest rate caps).
For example, if your initial rate is 6.5%, your mortgage may go up to
as much as 8.5% or down to 4.5% at the first adjustment period.
Fixed-rate loans
These loans generally have repayment terms
of 15, 20, or 30 years; some
lenders offer 40-year loans. Both the interest rate and the monthly
payments (for principal and interest) stay the same during the life of
the loan.
The interest rate that will apply after the
introductory period is over in a payment-option ARM; this is not the
Annual Percentage Rate (APR). This rate will be higher than the
introductory rate.
Good faith estimate
The Real Estate Settlement Procedures Act
(RESPA) requires your mortgage lender to give you a good faith estimate of all your closing costs within 3
business days of submitting your application for a loan, whether you
are purchasing or refinancing a home. The actual expenses at closing
may be somewhat different from the good faith estimate.
Purchase price if you are buying the home
or appraised value if you are refinancing your mortgage.
These ARMs are a mix--or a hybrid--of a
fixed-rate period and an adjustable-rate period. The interest rate is
fixed for the first several years of the loan; after that, the rate
will adjust annually. Hybrid ARMs are usually advertised as 3/1 or
5/1--the first number tells you how long the fixed interest rate period
will be and the second number tells you how often the rate will adjust
after the initial period. For example, a 3/1 loan has a fixed rate for
the first 3 years and then the rate adjusts once a year beginning in
year 4.
Index
The published rate that serves as a base
for the interest rate charged by the lender. The lender uses the index
to make changes in the interest rate on an ARM over time. No one can be
sure when an index rate will go up or down.
The initial contract interest rate of the
mortgage; this is not the annual percentage rate (APR). For example, if
you are considering a 5/1 ARM with an initial interest rate of 6.5% for
5 years and 1 point, you should enter 6.5.
Interest-only ARMs allow you to pay only
the interest for a specified number of years, typically between 3 and
10 years. This allows you to have smaller monthly payments for a period
of time. After that, your monthly payment will increase--even if
interest rates stay the same--because you must start paying back the
principal as well as the interest each month. For some I-O loans, the
interest rate adjusts during the I-O period as well. Enter the contract
interest rate for the mortgage, not the APR. For example, if the
contract interest rate is 5.5% for the first 3 years plus 1 point, you
should enter 5.5.
This is a traditional fixed-rate mortgage,
but you only pay interest for the first few years. Even though your
rate does not go up, your payments will go up after the interest-only
period because you must start paying back the principle as well as the
interest. Enter the contract interest rate for the mortgage, not the
APR. For example, if the contract interest rate is 7% plus 1 point, you
should enter 7.
Interest rate
The price paid for borrowing money, usually
given in percentages and as an annual rate.
The contract interest rate for the
mortgage; this is not the annual percentage rate (APR). For example, if
the contract interest rate is 7% plus 1 point, you should enter 7.
A limit on the amount your interest rate
can increase; there are two types of interest caps:
-
periodic adjustment caps, which limit
the interest-rate increase from one adjustment period to the next, and
-
lifetime caps, which limit the
interest-rate increase over the life of the loan. By law, virtually all
ARMs must have a lifetime cap.
The initial interest rate of the mortgage;
this is not the annual percentage rate (APR). This is usually a fairly
low number, generally between 1% and 3%. This rate applies only during
the introductory rate period, which may only be a few months.
The number of months that the introductory
rate applies. This number is likely to be between 1 and 3 months,
although some mortgages may apply the introductory rate for 6 months.
When the introductory period is over, the mortgage interest rate will
change to the fully indexed rate.
Loan origination fees
Fees charged by the lender for processing
the loan and are often expressed as a percentage of the loan amount.
Lock-in
Refers to a written agreement guaranteeing
a home buyer a specific interest rate on a home loan provided that the loan
is closed within a certain period of time, such as 60 or 90 days. Often
the agreement also specifies the number of points to be paid at closing.
Margin
The number of percentage points the lender
adds to the index rate to calculate the ARM interest rate at each
adjustment.
Minimum payment
The minimum amount that you must pay
(usually monthly) on your account. Under some plans, the minimum
payment may cover interest only; under others, it may include both
principal and interest.
Mortgage
A contract signed by a borrower when a home
is purchased that gives the lender the right to take possession of the
property if the borrower fails to pay off the loan as agreed in the
contract.
Negative amortization
Occurs when the monthly payments do not
cover all the interest cost; instead of paying down the loan balance,
you are adding to the amount you owe. The interest that is not paid in
the monthly payment is added to the loan balance. This means that even
after making many payments, you could owe more than you did at the
beginning of the loan. Negative amortization can also occur when an ARM
has a payment cap that results in monthly payments that are not high
enough to cover the interest due.
Overage
The difference between the lowest available
price and any higher price that the home buyer agrees to pay for the
loan. Loan officers and brokers are often allowed to keep some or all
of this difference as extra compensation.
Payment cap
A limit on how much the monthly payment may
change, either each time the payment changes or during the life of the
mortgage. Payment caps do not limit the amount of interest the lender
is earning, so they may lead to negative amortization.
Payment-option ARM
An ARM that allows you to choose among
several payment options each month. The options typically include (1) a
traditional payment of principal and interest, (2) an interest-only
payment, or (3) a minimum (or limited) payment that may be less than
the amount of interest due that month. If you choose the
minimum-payment option, the amount of any interest you do not pay will
be added to the principal of your loan. The interest rate on a
payment-option ARM is typically very low for the first few months (for
example, 2% for the first 1 to 3 months). After that, the interest rate
usually rises to a rate closer to that of other mortgage loans--the
“fully indexed rate.” Your payments during the first year are based on
the initial low rate, meaning that if you only make the minimum payment
each month, it will not reduce the amount you owe and it may not cover
the interest due. The unpaid interest is added to the amount you owe on
the mortgage, and your loan balance increases. This is called negative
amortization. This means that even after making many payments, you
could owe more than you did at the beginning of the loan. Also, as
interest rates go up, your payments are likely to go up.
Payment penalty
Extra fees that may be due if you pay off
the loan early by refinancing your loan, usually limited to the first 3
to 5 years of the loan’s term. These fees may make it too expensive to
get out of the loan. If your loan includes a prepayment penalty, be
aware of the penalty you would have to pay. Compare the length of the
prepayment penalty period with the first adjustment period of the ARM.
Ask the lender if you can get a loan without a prepayment penalty and
what that loan would cost.
Points
One point is equal to 1 percent of the
amount borrowed. For example, if the mortgage is $200,000, one point
equals $2,000. Lenders frequently charge points in both fixed-rate and
adjustable-rate mortgages to increase the profit on the mortgage or the
compensation to the lender or broker, and to cover loan closing costs.
These points usually are collected at closing and may be paid by the
borrower or the home seller, or may be split between them.
Amount of money you want to borrow; if you
plan to have 2 mortgages, this is the amount of the major (or primary)
mortgage.
Principal
The amount of money borrowed or amount
still owed on a loan.
Protects the lender against a loss if the
borrower defaults on the loan. It is usually required for loans in
which the down payment is less than 20 percent of the sales price or,
in a refinancing, when the amount financed is greater than 80 percent
of the appraised value. Once you have 20 percent equity in your home,
PMI is cancelled. Depending on the size of your mortgage and down
payment, these premiums can add $100-$200 per month or more to your
payments.
Purchase price or home value
The amount listed in your purchase
contract, the estimated price of a home you are considering, or the
appraised value of the home you are financing.
Second mortgage
A second mortgage is a loan taken after the
first (or primary) mortgage, and it is secured by the same property as
the first. A property can have multiple loans against it. The loan
which is registered with the county or city registry first is called
the first, or primary, mortgage. The loan registered second is called
the second mortgage. Second mortgages are called subordinate mortgages
because, if the loan goes into default, the first mortgage
gets paid off first before the second mortgage
gets any money. Thus, second mortgages are riskier for the lender, and
generally carry a higher interest rate.
You can use a second mortgage to make up
the difference between the down payment you can afford and 20 percent
of the home’s value. For example, your down payment may be only 10
percent; your primary mortgage would be 80 percent and your second
mortgage would be the remaining 10 percent. This allows you to avoid
paying PMI premiums.
Amount of money you plan to borrow as a
second mortgage. A second mortgage is a loan taken after the first (or
primary) mortgage, and it is secured by the same property as the first.
The loan which is registered with the county or city registry first is
called the first, or primary, mortgage. The loan registered second is
called the second mortgage. Second mortgages are called subordinate
mortgages because, if the loan goes into default, the first mortgage
gets paid off first before the second mortgage gets any money. Thus,
second mortgages are riskier for the lender, and generally carry a
higher interest rate.
You can use a second mortgage to make up
the difference between the down payment you can afford and 20 percent
of the home’s value. For example, your down payment may be only 10
percent; your primary mortgage would be 80 percent and your second
mortgage would be the remaining 10 percent. This allows you to avoid
paying PMI premiums. A
second mortgage is often a home equity loan or line of credit.
The contract interest rate for the second
mortgage; this is not the
annual percentage rate (APR). The calculator treats all second
mortgages as fixed-rate loans for the term you select. If you have a
variable-rate loan as your second mortgage, the amount shown in the
“Second mortgage” box on the Comparison page is the estimated payment
for the first month only.
Number of years you expect to have a second
mortgage. Most second mortgages are for 10 years or fewer.
Security interest
An interest that a lender takes in the
borrower’s property to ensure payment of a debt.
Settlement or closing costs
May include application fees; title
examination, abstract of title, title insurance, and property survey
fees; fees for preparing deeds, mortgages, and settlement documents;
attorneys’ fees; recording fees; and notary, appraisal, and credit
report fees. Under the Real Estate Settlement Procedures Act, the
borrower receives a good faith estimate of closing costs within three
days of application. The good faith estimate lists each expected cost
either as an amount or a range.
Thrift institution
Is a general term for savings banks and
savings and loan associations.
Type of ARM
The initial rate period and the adjustment
period for the loans you are considering. The most common ARMs are 2/1
(sometimes called 2/28), 3/1 (sometimes called a 3/27), 5/1, 7/1, and
10/1. You will need to compare at least one ARM and one fixed-rate
mortgage.
Variable rate
An interest rate that changes periodically
in relation to an index. Payments may increase or decrease accordingly.
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If
you are having difficulty making your mortgage payment, one of the most
important things you can do is seek assistance. The following resources
provide information and links to agencies and organizations that may be
able to help you.
