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GLOSSARY OF FINANCIAL TERMS
Adjustable Period: the length of time between interest rate changes on an ARM.
Adjustable Rate Mortgages (ARMs): have a low interest rate for the first year or two, after which it is adjusted regularly relative to a specific "index", with payments going up or down accordingly. The most commonly used indexes are rates on certain treasury notes or average regional or national cost of money to savings and loan associations. Some lenders use their own cost of funds, over which - unlike other indexes -they have some control.
Amortization: Repayment of a loan in equal installments of principal an interest, rather than interest-only payments.
Annual Percentage Rate (APR): the total cost of credit expressed as a yearly rate. Includes interest, loan discount fee (points) and other credit costs.
Application Fee: includes appaisal and credit report fees and Federal National Mortgage Association underwriting fee, if charged.
Appraisel Fee: inspection of the house and neighborhood review of sale prices of comparable houses to determine value of property; may be included in mortgage or application fees.
Assumable Loan: one transferable from seller to buyer. May require larger down payment, but interest rate could be lower.
Assumption Fee: sometimes charged for processing buyer's assumption of seller's loan.
Balloon Payment: a lump sum principal payment due at the end od some mortgages or other long-term loans.
Binder:also known as an offer to purchase or an earnest money receipt. A binder is the acknowledgment of a deposit along with a brief written agreement to enter into a contract for the sale of real estate.
Buydown: amount seller pays to lender so buyer gets lower interest rate. Inflated or non-negotiable selling price covers buydown.
Cap: the limit on how much an interest rate or monthly payment can change, either at each adjustment or over the life or the mortgage.
Closing/Settlement: all paperwork, financial transactions completed and title passes from seller to buyer.
Contingency: a condition that must be satisfied before a contract is binding. For instance, a sale agreement may be contingent upon buyer obtaining financing.
Conversion Clause: a provision in some ARMs that enables you to change an ARM to a fixed rate loan, usually after the first adjustment period.
Cooperative: a form of multiple ownership in which a corporation or business trust entity holds title to a property and grants occupany rights to shareholders by means of proprietary leases or similar arrangements.
Credit Report Fee: covers the cost of buyer's credit report; may be inculded in the application fee.
Document Preparation Fee: cost of preparing final legal papers.
Due On Sale Clause: an acceleration clause that requires full payment of a mortgage or deed of trust when the secured property changes ownership.
Earnest Money: the portion of the down payment delivered to the seller or escrow agent by the purchaser with a written offer as evidence of good faith.
Escrow Agent: person or company holding all documents, monies until closing/settlement.
FHA Loan: a loan insured by the Insureing Office of the Department of Housing and Urban Development; the Federal Housing Administration.
Federal National Mortgage Association (FNMA): popularly known as Fannie Mae. A privately owned corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA or guaranteed by the VA, as well as conventional home mortgages.
Finance Charge: the total cost a borrower must pay, directly or indirectly, to obtain credit according to Regulation Z.
Fixed Rate Mortgage: the interest rate does not change over the life of the mortgage. "Conventional" mortgage loans are available as are loans insured through the Federal Housing or Farmers Home Administrations and those guaranteed by the Veterans Administration. All have fixed rates, as do some "assumable" and "owner-financed" loans.
Graduated Payment Mortgages: offer fixed interest rates and a 30-year term. Payment amounts start at a low level, then gradually increase over a few years to an amount which will amortize the loan in the 30-year period.
Growing Equity Mortgages: offer fixed interest rates and a 30-year term. Monthly paymnets amounts are at the 30-year rate for a specified period of time, then increase 2-5% annually.
Hazard Insurance: protects lender and buyer against loss of fire, wind storm, other natural hazards.
Home Protection Plan: from builder of new home to protect against faulty materials, workmanship; on used home, first year protection against unexpected major repair expense, breakdowns.
Index: a measure of interest rate changes used to determine changes in an ARM's interest rate over the term of the loan.
Lender's Inspection Fee: for inspection of new construction by lender's personnel or outside inspector.
Lien: a legal hold or claim on property as security for a debt or charge.
Loan Commitment: a written promise to make a loan for a specified amount on specified terms.
Loan-To-Value Ratio: the relationship between the amount of the mortgage and the appraised value of the property, expressed as a percentage of the appraised value.
Margin: difference between index and actual interest rate of adjustable rate of mortgage.
Mortgage Life Insurance: a form of term life insurance often bought by mortgagors.
Negative Amortization: negative amortization occurs when monthly payments fail to cover the interest cost.
Notary: Fee: cost of a licensed person authenticating execution of documents by both parties.
Points: charged in both fixed and adjustable rate mortgages to increase mortgage yield, and cover closing costs. A "point" is 1% of the amount of the mortgage.
Reserve Accounts: funds accumulated and held by lender to pay taxes, hazard insurance premiums, and/or assesments imposed by municipalities or subdivisions; also called prepaids, impounds or escrow acconts.
Short Term Balloon: mortgages are fixed rate, discount-priced and based on the Federal Reserve's Discount rate plus a 1/4 -3/8% local add-on. They are keyed to a 30-year payout and must be paid off or refinanced in 7-10 years.
Title Insurance: often required to protect lender against loss due to undiscovered title defects. An owner's policy costs less if bought at the same time. A "Title Insurance Binder," is a "commitment to insure the lender."
VA Loan: a loan that is partially guaranteed by the Veterans Administration and made by a private lender.