Home Loans Glossary of Terms

Adjustment Interval:
On an ARM – it is the time between changes in the interest rate or monthly payment. The rate adjustment interval is often displayed in x/y format, where "x" is the period until the first adjustment, and "y" is the adjustment period thereafter. For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after which it is adjusted every year. The rate adjustment interval and the payment adjustment interval are the same on a fully amortizing ARM, but may not be on a negative amortization ARM.

APR (Annual Percentage Rate):
This is the interest rate on the loan plus any points and closing costs, calculated over the term of the loan. This should be used as a guide for shopping for a mortgage, since it may show hidden fees. It is not the same as the interest rate on which your mortgage payments are calculated.

ARM (Adjustable Rate Mortgage):
This is a mortgage with a rate that is fixed for a specific initial period, but which adjusts at a specific frequency based on the given index plus a lender determined margin. ARMs are usually expressed as the following examples:

• 1/1 ARM - A mortgage with a fixed rate for 1 year that adjusts annually thereafter.
• 3/1 ARM - A mortgage with a fixed rate for 3 years that adjusts annually thereafter.
• 3/3 ARM - A mortgage with a fixed rate for 3 years that adjusts every three years.
• 5/1 ARM - A mortgage with a fixed rate for 5 years that adjusts annually thereafter.
• 7/1 ARM - A mortgage with a fixed rate for 7 years that adjusts annually thereafter.
• 10/1 ARM - A mortgage with a fixed rate for 10 years that adjusts annually thereafter.

An opinion of the market value of a property, made by a qualified appraiser.

Balloon Mortgage:
Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in a contract.

A permanent buy-down is the payment of points in exchange for a lower interest rate. A temporary buy-down concentrates the rate reduction in the early years.

A provision of an ARM limiting the interest rate or mortgage payment's increase.

Cash-Out refinance:
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes "cash-out" of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.

Construction Loan:
A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

Debt-to-income Ratio:
The ratio, expressed as a percentage, which results when the borrower's monthly payment obligation on long-term debts is divided by his/her gross monthly income.

Equal Credit Opportunity Act (ECOA):
Federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Fixed Rate Mortgage:
A mortgage in which the interest rate is set for the term of the loan.

Hazard Insurance:
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm, etc.

Homeowner's Insurance:
A policy that combines liability coverage and hazard insurance.

Homeowner's Warranty:
A type of insurance that covers repairs to specified parts of the house for a specified period of time.

Housing Expenses-to-income Ratio:
The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income.

The portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

A published interest rate against which a lender measures the difference between the current interest rate on an adjustable rate mortgage and that earned on other investments, which is then used to adjust the interest rate.

Jumbo Loan:
A loan amount that is higher than the standard secondary mortgage market "conforming" loan amount as determined by FNMA (Fannie Mae) and FHLMC (Freddie Mac).

Loan-to-value Ratio:
The relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage.

For Adjustable Rate Mortgages (ARMs), the margin is the difference between the note rate and the index on which the note rate is based expressed in percentage terms.

Mortgage Insurance (Private Mortgage Insurance or PMI):
Monet paid to insure the mortgage when the down payment is less than 20 percent. It protects a lender against a loss if the borrower defaults.

A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Pre-payment Penalty:
Money charged for an early repayment of debt.

One point equals 1% of the mortgage amount. This is a closing cost and may be tax deductible (have members consult their tax advisor). Typically, the more points paid at the time of closing, the lower the interest rate on the mortgage.

Title Insurance:
A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often paid for by the purchaser and/or seller.

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

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