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Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Adjustment periodThe adjustment period is the frequency that the lender adjusts the interest rate on a variable-rate mortgage loan. For example, a 1-year ARM would have an adjustment period of one year.
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Annual percentage rate
The effective interest rate paid on a loan, expressed as an annual rate. APR measures the true interest cost of borrowing by including any fees or prepaid interest involved in obtaining a loan. For instance, if a borrower pays $500 in closing costs to obtain a $10,000 loan but only receiving net proceeds of $9,500. The federal Truth-in-Lending Act requires lenders to disclose the APR.
Annuity
An annuity is an amount payable annually. More specifically, an annuity describes a contract offered by insurance companies which allows you to accumulate funds for retirement on a tax-favored basis and then, if you choose, receive a guaranteed income payable for life or for a period certain such as five or ten years. Usually, the payments are made monthly, but many companies offer to make the payments quarterly, semi-annually, or annually if you so desire. Read More about Annuities.
Appraisal value
Appraisal value is the market value of an asset that is derived from the appraisal process. Depending on the asset, the method used to appraise the asset will differ. For homes, appraisers often use a method that includes recent sales data of comparable homes. They may also use the replacement method, which is the cost to replace the home at today's prices.
Closing costs
Closing costs are the total expenses that the buyer pays at the time a real estate transaction is completed. This stage of the transaction is called "closing." Closing costs include application, underwriting and loan-origination fees; mortgage points; title search and insurance; fees for related legal services; and costs to fund an escrow account. For home mortgage loans, closing costs generally range between 3 and 6 percent of the home purchase price.
Conforming loan
A conforming loan conforms to the requirements of Fannie Mae and Freddie Mac. Usually, the specific reference is to loan amount. The maximum loan amount for 2006 as specified by Congress for single family loan purchased by either of these two agencies is $417,000. The term also refers to a loan which conforms to all of the other borrower and property requirements of these two agencies.
Conventional loan
A conventional home loan is one which is not guaranteed by the Federal government. This is also true of FHA and VA loans.
Cost-benefit analysis
For autos: an analysis that compares the cheaper of a) borrowing money to buy a car and paying the interest, with b), paying cash for a car, and losing the opportunity to earn a rate of return on the savings applied to the purchase. For homes: an analysis that subtracts the benefits of homeownership from the costs of homeownership to obtain a net cost. Included in costs are mortgage interest, discount points, closing costs, property taxes and homeowner's insurance, home maintenance costs, and any private mortgage insurance (PMI). Included in benefits are the tax savings on deductions for mortgage interest (including points) and property taxes, and an increase in equity that you receive either from repayment of the loan principal or an appreciation in the value of your home.
Draws (on a credit line)
Draws, or drawdowns, are other names for withdrawals that you make on a line of credit. With a credit line, you only pay interest on the amount of your withdrawals, and only for the period that you have borrowed the money.
Fannie Mae/Freddie Mac/Ginnie Mae
Fannie Mae is the more personalized name for The Federal National Mortgage Association (FNMA), Freddie Mac is a similar name for The Federal National Mortgage Loan Corporation (FHLMC), and Ginnie Mae refers to the Government National Mortgage Association (GNMA). Fannie and Freddie are quasi-governmental agencies which serve as a conduit between the capital markets of Wall Street and home lending across the United States. Ginnie Mae performs a similar function for government FHA and VA home loans.
FHA
An FHA refinance mortgage or FHA loan allows for the refinance or purchase of a home with a low down payment. These loans are great for the first-time home buyers. Remember, the FHA does not make home loans. They insure the FHA loans that we can assist you in getting.
FICO score
In order to streamline the decision making process, the lending industry has developed a system which scores the borrower's credit history. The score is seen as predictive of the borrower’s ability and willingness to repay the loan. Such scoring gives the lender the ability to give the borrower a rapid credit decision by using automated underwriting software currently available. Few lenders base their entire credit decision on the score, however. Lower FICO scores usually trigger a real live underwriter review of the loan application and credit report before a final decision is made.
Future interest rates
The periodic resetting of the interest rate on a loan to comply with the terms and conditions of the loan agreement. Most home equity lines of credit and other forms of revolving credit are made at an interest rate that is periodically reset to a market interest rate. One common rate is the prime rate, used by the biggest banks in the U.S. to price loans made to their best customers.
Income tax rates
The Economic Growth and Tax Relief Reconciliation Act of 2001 cut tax rates for all individual income tax brackets except the 15% bracket. A sixth tax bracket of 10% was added for the first $6,000 of income for single taxpayers, $10,000 for single parents, and $12,000 for married taxpayers. Income tax rates for 2001 are 39.1%, 35.5%, 30.5%, 27.5%, 15%, and 10%. Tax rates for 2002 are 38.6%, 35%, 30%, 27%, 15%, and 10%. The next phase of tax-rate cuts occurs in 2004.
Loan-to-value (LTV) ratio
Homes: Loan-to-value ratio is a key factor in determining how much of a home you can qualify for. To calculate, divide the mortgage loan amount by the fair market of the home value. A recent appraisal is generally required to determine fair market value. If you have existing mortgage debt or are adding debt, divide the combined mortgage balance by the home value. For example, a mortgage loan of $150,000 on a home that is appraised at $200,000 has an LTV of 75%. As a general rule, mortgage loans that exceed an LTV of 80% require private mortgage insurance.
Mortgage points
Mortage points are also called discount points, points, loan discount points, loan origination fees or maximum loan charges. A point is equal to 1 percent of the loan amount. For example, 1 point on a loan of $150,000 equals $1,500. Lenders consider mortgage points as interest that you pay in advance. As a result, the more points you pay when you close the loan, the lower your interest rate. If you qualify, you may be able to deduct mortgage points in the year you close the loan for tax purposes. Otherwise, you will have to amortize the points paid over the term of the loan.
Non-Conforming loan
A non-conforming loan is generally meant to be those loan amounts above $417,000. The term can also refer to those loan programs which allow for different borrower and property characteristics than usually required by Fannie Mae and Freddie Mac.
Private mortgage insurance (PMI)
Private mortgage insurance is an insurance policy that a residential mortgage lender requires of the borrower if the loan-to-value (LTV) ratio of the home is greater than 80%. Mortgage insurance protects the lender from the risk that the borrower may default on the loan. Federal law requires lenders to notify borrowers when the loan-to-value ratio drops below 80%. Mortgage insurance premiums vary, but generally range from $1,000 to $5,000 a year for an average priced home.
Savings interest rate
The savings interest rate is the yearly interest rate you earn on your savings. It is also used to calculate the opportunity cost of paying with cash. In contrast, the saving rate is the percentage of income you save.
Term
The period of a loan, generally measured in years. Auto loans: generally range between two and five years. Mortgage loans: generally 15 or 30 years.
Title Insurance
Title insurance insures your ownership rights in the property. More specifically, it insures the ability of past owners to pass ownership rights on to you. It also insures you against loss from easements of public record which were not included in the title report, like a utility easement through your living room.
Types of loans
Four major loan types are
- 1) Mortgage loans are those you take out to pay for your home. In exchange for a loan to buy your home, you give the mortgage lender the legal right to use your home as collateral. A first mortgage lien is the legal right you give the lender to buy your home. If you later need to borrow more money, and are willing to use the equity in your home as collateral, a lender will often make you a second mortgage loan (at a higher rate than your first mortgage) in exchange for a lien on your home that is subordinate to the first mortgage lien. If you itemize your tax deductions, the interest you pay on your income taxes can be deducted from your income, lowering your taxes.
- 2) Home equity loans and lines of credit are loans and lines of revolving credit that you take out using the equity in your home as collateral. Some lenders require that you use the loan money to make improvements in the home, such as adding a room or replacing worn-out interior fixtures. A home equity credit loan is funded for the full amount at the time of your loan closing with a loan payment schedule that pays back the loan in full to the lender during an agreed-upon term. A home equity line of credit is a form of revolving credit that gives you more flexibility: the full amount of the line is accessible to you but you can make drawdowns as you need them, paying interest only on the amount of the credit line that you have withdrawn.
- 3) Personal loans and lines of credit are loans and lines of credit made with no collateral. Because they do not offer the lender the protection of collateral, these loans and revolving credit lines are often made only at higher interest rates.
- 4) Consolidation loans and refinancings are loans that you take out to repay other loans that have higher interest rates or monthly payments. You will need to consider any mortgage points or other closing costs you will have to pay. The Truth-in-Lending Act(TILA) requires that the lender disclose all of these costs to you, as well as show the amount of total payments you will make over the term. If you borrow from a lender that specializes in consolidation loans, be especially vigilant in learning the amount of total payments. Some consolidation-lenders feature lower monthly payments or interest rates but stretch out the loan term so that the amount of total payments rises significantly.
Upfront costs
Upfront costs are fees and any other costs that you pay at a loan closing. This includes mortgage loans, as well as consumer and installment loans, such as home equity, refinancing, personal or auto loans. Upfront costs are also called closing costs. Upfront costs include the amount needed for a down payment, any prepaid interest, loan underwriting fees, and fees that you pay for ancillary services. These include fees for title search, appraisal and credit report.
VA Loans
A VA loan is a loan that a veteran of the arm services is entitled to get. You can receive up to 100% financing of the purchase price and do not have to pay a monthly PMI payment.