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A
Adjustable-rate mortgage (ARM)
A mortgage that does not have a fixed interest rate. The rate changes during
the life of the loan in line with movements in an index rate, such as the rate for
Treasury securities or the Cost of Funds index.
Amortizing loan
Monthly payments are large enough to pay the interest and reduce the
principal on your mortgage.
Annual Percentage Rate (APR)
A measure of the cost of credit, expressed as a yearly rate. It includes interest
as well as other charges. 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.
Application fee
Fees that are paid upon application. May include charges for property
appraisal and a credit report.
Assumability
When a home is sold, the seller may be able to transfer the mortgage to
the new buyer. This means the mortgage is assumable. Lenders generally
require a credit review of the new borrower and may charge a fee for the
assumption. Some mortgages contain a due-on-sale clause, which means
that the mortgage may not be transferable to a new buyer. Instead, the
lender may make you pay the entire balance that is due when you sell
the home. Assumability can help you attract buyers if you sell your home.
B
Balloon payment
A lump-sum payment that may be required when the plan ends.
Buydown
With a buydown, the seller pays an amount to the lender so that the lender
can give you a lower rate and lower payments, usually for an early 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.
C
Cap, interest rate
A limit on the amount your interest rate can increase. Interest caps come
in two versions:
periodic caps, which limit the interest-rate increase from one adjustment
period to the next, and
overall caps, which limit the interest-rate increase over the life of the loan.
By law, virtually all ARMs must have an overall cap.
Cap, payment
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.
Closing costs
Fees paid at closing, including attorneys fees, fees for preparing and
filing a mortgage, fees for title search, taxes, and insurance.
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.
D
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.
E
Equity
The difference between the fair market value of the home and
the outstanding mortgage balance.
G
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.
I
Index
The index is the measure of interest-rate changes that the lender uses
to decide how much the interest rate on an ARM will change over time.
No one can be sure when an index rate will go up or down. Some index
rates tend to be higher than others, and some change more often. You
should ask your lender how the index for any ARM you are considering
has changed in recent years, and where the index is reported.
Interest
The price paid for borrowing money, usually given in percentages and
as an annual rate.
Interest rate
The periodic charge, expressed as a percentage, for use of credit.
M
Margin
The number of percentage points the lender adds to the index rate to
calculate the ARM interest rate at each adjustment.
N
Negative amortization
Occurs when the monthly payments do not cover all the interest owed.
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.
P
Points
One point is equal to 1 percent of the principal amount of your mortgage.
For example, if the mortgage is for $65,000, one point equals $650.
Lenders frequently charge points in both fixed-rate and adjustable-rate
mortgages in order to increase the yield on the mortgage 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.
Prepayment penalty
Extra fees that may be due if you pay off the loan early by refinancing your
home. 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. Ask the lender if you can get a loan without a prepayment
penalty, and what that loan would cost.
Principal
The amount of money borrowed or the amount still owed on a loan.
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