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Home Loan Guide
Step 6
Understanding the Terminology
Adjustable Rate Mortgage (ARM)
A loan with an interest rate tied to a specific economic index that can be adjusted periodically in response to market conditions. Rate caps and payment caps usually limit the amount of change.
Adjustment Period
The interval at which the loan rate and/or monthly payment of an adjustable loan can be periodically changed by a lender, typically one or more times per year.
Amortization
A schedule in which a loan is paid off in regular, periodic installments of principal and interest.
Annual Percentage Rate (APR)
The actual annual interest rate, which must be disclosed under the Federal Truth in Lending Act. It is the total cost or finance charge for a loan per year, expressed as a percentage.
Appraisal
A written estimate report prepared by an appraiser regarding the current market value of a property.
Assumability
A feature which allows a buyer of mortgaged property to take over the payments in place of the original borrower.
Closing Costs
Expenses that must be paid before the loan can be funded. Such expenses include escrow fee, title insurance premium, deed recording fee, title transfer tax, etc. Your lender will give you an estimate of the closing costs when you apply for a loan.
Convertible Loan
A loan type which starts out as a fixed rate, then changes to an adjustable rate at the end of the specific fixed rate period.
Conventional Loan
A loan made by a lender without the backing provided by private mortgage insurance or government (FHA/VA) guarantees.
11th District Cost of Funds
A financial index based on the average interest costs on deposits at savings & loan institutions in the 11th District of the Federal Home Loan Bank.
Equity
The difference between the current value of the property and the loan amount outstanding.
Escrow Company
A neutral third party that ensures all requirements are met and all documents are complete in the sale and purchase of a property.
FHA Loan
A low down payment loan program insured by the Federal Housing Administration. The FHA protects the lender against loss if the borrower defaults on the loan.
Fixed Rate Mortgage
A loan with no change of interest rate over the entire term of the loan. As a result, a borrower's principal and interest monthly payments remain the same over the life of the loan.
Index
Used by lenders to determine how the interest rate will change on an ARM during its term. Indexes used generally reflect prevailing market rates, although certain indexes are more volatile than others.
Initial Interest Rate
An introductory rate of the ARM loan for six months or a year before adjustment period. Initial interest rate is usually lower than the fully indexed rate on the loan.
Life Time Cap
A limit on how much the interest rate can change over the life of the ARM.
Loan Fees
Fees incurred in obtaining a loan such as documentation fee, loan processing fee, credit report fee, and appraisal fee.
Loan-To-Value Ratio (LTV)
The ratio, expressed as a percentage, of the amount of a loan to the purchase price or the appraised value of the property, whichever is less.
Margin
The amount, expressed as a percentage, that a lender adds to the index rate to calculate the interest rate on an ARM at each adjustment.
Negative Amortization
A condition created when monthly payments do not cover all of the interest costs, typically because payment caps limit the monthly payments which are less than that required to cover the interest due. The interest cost that is not covered is added to the unpaid principal balance.
Payment Caps
The maximum amount of payment that an adjustable rate loan can change at each adjustment period. A loan with a payment cap typically has the potential for negative amortization. Since the interest rate can adjust more frequently than the payment, the payment may not cover the amount of interest due.
Periodic Rate Caps
A limit on how much the interest rate can change at each adjustment over the life of the ARM.
Points
A service charge for obtaining a loan. One point equals to one percent of the loan amount.
Prepayment penalty
Some lenders would charge for a prepayment penalty if the loan is paid off before it is due.
Principal
Principal is the outstanding balance you owe your lender.
Private Mortgage Insurance (PMI)
Insurance against a loss by a lender in the event of default by a borrower. Usually PMI is required when loan-to-value ratio is higher than 80%.
Rate Lock
Lender guarantees the same rate from the time you apply for a loan to the final closing. Usually interest rate can be locked from 30 days to 60 days.
Refinance
Obtaining a new loan to pay off the existing loan. Usually the existing loan has higher interest rate than the current market rate.
Term
The scheduled number of years it will take to pay off your loan.
Title Insurance
A policy purchased by the buyer of a house to ensure that the title is free of any liens other than that held by the buyer.
Underwriting
Underwriting Established criteria to determine if a borrower qualifies for a loan.