Adjustable Rate Mortgage (ARM) – With an ARM, the interest rate is tied to a leading economic indicator such as the one-year Treasury Bill rate or the cost of funds for an area. The index, plus a margin, typically 2.0 percentage points, determines what the new interest charges will be. In exchange for allowing the lender to adjust the interest rate, borrowers get an initial rate that is lower than fixed-rate loans. The lower initial rate makes it easier to qualify, because the initial monthly payments are smaller. Rate adjustments are made at regular intervals through out the term of the loan, usually every year. Make sure you know which index to which the rate is tied, and follow the index yourself in the newspaper. Typically an ARM has an interest rate cap, which limits how much of a rise you can get in any one year and over the total life of the loan. Most ARMs have annual caps of two percentage points and six percentage points over the life of the loan. This is a great product for first time home buyers.
Adjustable Index – is the guide lenders use to adjust or change ARM interest rates during the life of the mortgage. When the adjustment period arrives, the change is made according to one of many widely published indices over which the lender has no control. The specific index to which your ARM is tied will be spelled out in the mortgage contract and will vary from lender to lender. Some lenders may offer you a choice of indices.
Annual Cap – is the limit on how high the interest rate of an ARM can rise during the single year. Annual caps are specified in all of the better ARM mortgage programs. Don't sign without one.
Annual Percentage Rate (APR) – is the true cost of a loan, including all financing charges and fees. The APR is expressed as an annual percentage rate, as required by the Truth In Lending Act.
Amortization – is the act of reducing the amount owed on a loan. Amortization can be made either in one or more lump sums, as well as in periodic installments.
Appraisal Value – is an estimate of the property's worth, usually based on recent sales of comparable properties nearby. Appraisals, done by certified professionals, are used by lenders to verify a home's value and to justify a lender's mortgage commitment for the home.
Buydown – is the act of buying a lower interest rate by paying more points at the closing.
Conventional Mortgage – is a loan for $333,700 or less, that meets the standards set by Fannie Mae and Freddie Mac, the largest purchasers of home mortgages on the secondary market.
Convertible Mortgage – is an ARM that has the option of being converted to a fixed-rate mortgage at specific times during the life of the loan.
Escrow Accounts – under state law, mortgage borrowers can choose between paying their real estate taxes themselves or making monthly payments into an escrow account with their lender. All FHA and VA loans require escrow accounts.
^ Back to Top
Fannie Mae – refers to the Federal National Mortgage Association, a federally chartered, publicly traded corporation that buys mortgage loans from primary lenders and mortgage bankers, then packages them for sale on the secondary market. It sets the standard for credit requirements and maximum loan sized in the industry. FHA Loans - are issued by FHA-approved lenders. The FHA insures its loans so borrowers can get them with only a three to five percent down payment, and some of the closing costs can be financed into the loan. Anyone can qualify for an FHA mortgage. All you need is a good credit rating, an ability to repay the loan, a 3-5 percent down payment, and the balance of closing costs and prepaid requirements. Maximum loans are set by the FHA on a county-by-county basis to allow for differences in area housing prices.
Fixed Rate Mortgages – Here interest and monthly payment are fixed for the full term of the loan, typically 30 or 15 or 10 years, though other terms are available. The advantage of a fixed-rate loan is that the borrower always know what the cost is for the life of the loan. Fixed-rate mortgages are most attractive when interest rates are low. When interest rates rise, it become more difficult to qualify for a fixed-rate loan because monthly payments are high. The lower the interest rate, the more expensive a home you can afford.
Freddie Mac – refers to the Federal Home Loan Mortgage Corporation,another federally chartered, publicly traded organization that purchases mortgage loans.
Interest Rate – is what lenders charge borrowers for renting their money, expressed as an annual percentage of the amount borrowed, before factoring in financing charges and fees.
Initial Interest Rate or Teaser Rate – is the interest charged on an ARM until the first adjustment is made. Most ARM programs offer initial interest rates well below fixed-rate mortgages.
Interest Only Loans
Jumbo Mortgages – are loans for more than $333,700. The interest rate is usually a quarter of a percentage point higher than on conventional loans.
Lifetime Cap – is the same as an annual cap on an ARM, except the limit is on how high the interest rate can rise over the entire life of the mortgage.
Loan Commitment – is a promise by a lender to provide a specified amount of money (the mortgage) in order to close on a home. Loan commitments also will specify the mortgage's interest rate and a time frame, usually 60 days, within which the loan must be used.
Loan Servicing – refers to handling billing, collecting payment and paperwork, associated with on-going mortgages.
Loan-To-Value Ratio (LTV) – is the proportional relationship of a mortgage loan to the value of a home, expressed as a percentage. For instance: A $100,000 home purchased with a m$75,000 mortgage would have an LTV of 75 percent.
Margin – is an additional charge added to an ARM index when the adjustment period arrives.
^ Back to Top
Mortgage Brokers – originate loans that are funded by primary lenders. Getting your loan through a mortgage broker is riskier than through a primary lender or mortgage banker, because in times of tight money, mortgage brokers are the first lenders to have difficulty fulfilling their mortgage commitments.
Mortgage Term – is the length of time specified in the contract for repaying the loan, sometimes called the contact life of a loan.
Negative Amortization – is associated only with ARMs and can occur when a scheduled mortgage payment is too small to pay interest charges on a loan. In such cases, the cash shortfall is added to your mortgage principal, thus making your outstanding mortgage balance grow.
Points, or Loan Origination Fees – are the up front cash paid to lenders at closing as an inducement for making the loan. Each point equals one percent of the loan amount. Typically, lenders charge one to three points when making mortgages. Sometimes buyers will opt for higher points in exchange for lower interest rates.
Pre-Approved Mortgages – many lenders now offer pre-approved loans based on your credit report, income and deposit verifications. Once you gain pre-approval, you can begin the house hunting knowing that you have a mortgage. For final processing, you need to submit the written sales contract and have the property appraised.
Primary Lenders – generally include credit unions, S & Ls and banks. Primary lenders make loans to consumers with their own cash and service the mortgages they issue.
Retire (a loan) – to pay off a loan. Mortgages can be retired either at the end of their term or sooner. However, in some states early retirement of a loan may carry a pre-payment penalty.
Self-Amortizing Mortgage – is a loan with regular monthly payments that are sufficient to cover interest carrying charges plus the principal necessary to repay the entire loan by the end of the contracted mortgage terms.
VA Mortgages – are guaranteed by the Department of Veterans Affairs for honorably discharged veterans. Current guidelines allow veterans to borrow up to $207,000 with no down payment. Larger loans would be possible with a down payment, though lenders are reluctant because investors usually won't buy large VA mortgages. Veterans pay a 2.0 percent funding fee, a one percent origination fee, an appraisal fee, and other closing costs. The VA funding fee is waived if the veteran has a service-related disability. Points on the loan are paid by the seller. Underwriting requirements are more liberal than for FHA or conventional mortgages, so it's easier to qualify for a VA loan. To qualify, veterans must have served at least 181 days during peace-time and have been honorably discharged. Veterans who entered the military after September, 1980, must have 24 months of service. Vets serving during wartime need only 90 days of service. Unmarried surviving spouses of veterans who died in service are eligible for VA loans.
^ Back to Top 
