An adjustable rate mortgage (ARM) is a thirty-year, or sometimes forty-year, loan that has an interest rate fixed for an initial period of three, five, seven or ten years. After the fixed period, the interest rate, and therefore the payment, adjust annually for the remainder of the loan term. Once the fixed period has ended the interest rate on the loan is determined by adding a margin to the index specified by the lender, subject to an adjustment cap and a life cap. Here is an example: Jane has a loan fixed for 5 years at 4.00%, the start rate. After the five-year fixed period has ended, the interest rate on Jane’s loan will adjust annually. The terms of her loan specify a margin of 2.50% over the index, the 1 year LIBOR, with caps of 2/2/5. The caps number refers to three things: the first number is the initial adjustment cap, 2.00%, the second is the cap on all future adjustments, 2.00%, and the last number is the life cap, 5.00%. Here is how all of this works: at the first adjustment, after the five-year fixed period has ended let’s assume the one year LIBOR is at 4.37%. The terms of the loan call for the interest rate to adjust to 2.50% over the one-year LIBOR: 4.37%+2.50% = 6.87%. However, the initial adjustment cap is 2.00%; this means that regardless of how high the index has moved, at the first adjustment the interest rate cannot go higher than 2.00% over the start rate of 4.00%. Even though the margin + index = 6.87%, during that first year the interest rate will be 6.00%, because of the initial adjustment cap. Now, the loan will adjust annually. The adjustment cap is 2.00%. That means that the interest rate on the loan cannot increase or decrease by more than 2.00% at each annual adjustment, regardless of how high, or low, the index is. Finally, we have the life cap, 5.00%. The actual life cap, the highest interest rate that Jane can ever be charged on this loan, is 5.00% over the start rate of 4.00%, or 9.00%. Even if the index is at 15.00% when her loan makes its annual adjustment, Jane’s interest rate can never be higher than 9.00%.
With an ARM, the adjustment cap is the maximum percentage change allowed at any adjustment period. Generally, adjustment caps are 2%, although there may not be a cap for the first adjustment.
The date on which the interest rate changes for an adjustable rate mortgage.
The lowering of the loan balance over time by payment of loan principal. A conventional mortgage loan payment will gradually shift from being primarily mortgage interest at the beginning of the loan term, to primarily principal at the end. The precise amortization of any loan can be seen by using an amortization schedule, which a lender should be able to provide.
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for 30 year fixed rate mortgage, the amortization term is 360 months.
The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.
A mortgage that can be taken over (“assumed)” by the buyer when a home is sold.
A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon sale or transfer of the property.
The fee paid to a lender (usually by the purchaser of real estate) when an existing mortgage is assumed by a new buyer.
A mortgage that has level monthly payments that will amortize over a stated term, but that provides for a lump sum payment to be due at the end of an earlier specified term. For example, a ‘30 due in 7 mortgage’ would have monthly payments of principal and interest determined on a 30 year amortization, but the entire remaining principal balance would have to be repaid at the end of year seven, the maturity date.
The final lump sum payment that is made at the maturity date of the balloon mortgage.
A basis point is 1/100 of a percentage point. For example, a fee calculated at 50 basis points of a loan amount of $100,000 would be .50% of $100,000, or $500.
The person designated to receive the income from a trust, estate, or a deed of trust.
A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 biweekly payments are each equal to one half of the monthly payment that would be required if the loan were a standard 30-year-fixed rate mortgage, and they are usually drafted from the borrower’s bank account. The result for the borrower is a substantial savings in interest.
A form of second mortgage that is collateralized by the borrower’s present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as a swing loan.
A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to prepay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words a refinance transaction in which the borrower receives additional cash that can be used for any purpose.
A document issued by the federal government certifying a veteran’s eligibility for Department of Veteran Affairs (VA) mortgage.
A document issued by the Department of Veterans Affairs that establishes the maximum value and loan amount for a VA mortgage.
The history of all of the documents that transferred title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
A title that is free of liens or legal questions as to ownership of the property.
A fee or amount that a home buyer must pay at closing for a single service, tax, or product. Closing costs are made up of the individual closing cost items such as loan fees, escrow and title fees, insurance or homeowner’s association dues, property taxes, etc..
Also referred to as the HUD-1. The final statement of costs incurred to close on a loan or to purchase a home.
The unpaid principal balance of all the mortgages on a property (first and sometimes a second) divided by the property’s appraised value.
A person who signs a promissory note along with the borrower. The borrower and the co-signer are equally responsible for the repayment of the loan, and the loan will appear on the credit report of both.
A real estate project in which each unit owner has deeded title to a unit in the building, an undivided interest in the common area of the project, and sometimes exclusive use of certain limited common areas. Each unit is an individual piece of real property with it’s own parcel number.
Changing the ownership of an existing with two or more living units to the condominium form of ownership.
A short term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses, subject to satisfactory inspection of that work by the lender.
Credit bureau or consumer reporting agency An organization that prepares reports that are used by lenders to determine a potential borrower’s credit score. The agency obtains data for these reports from a credit repository as well as from other sources. There are three primary credit bureaus that lenders use to generate a tri-merge mortgage credit report, TransUnion, Equifax, and Experian.
A condition that must be met for a contract to be legally binding. For example, home purchases often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report; other common contingencies are loan approval and appraisal.
An adjustable rate mortgage (ARM) that can be converted to a fixed-rate mortgage after the initial three, five, seven, or ten year period of the loan. ARMs become adjustable after the initial fixed period; if the ARM has a fixed rate conversion option, the loan will have a formula that determines the rate should the borrower opt for an interest rate fixed for the remainder of the ARM loan term
A type of multiple ownership in which the residents of a multiunit housing complex owns shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.
The credit score is determined by a credit bureau using a proprietary alogrithm to examine a person’s credit history. There are three primary credit bureaus that lenders use, TransUnion, Equifax, and Experian. Lenders generally use the middle of the three scores to determine loan pricing; if there are two or more borrowers on a one loan, the lender will use the lowest middle score of all the borrowers.
Monthly revolving and installment debt plus housing expense divided by gross monthly income.
The legal document conveying title to a property.
A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure.
A decline in the value of property; the opposite of appreciation.
The part of the purchase price of the property that the buyer pays in cash and does not finance with a mortgage.
A provision in a mortgage that allows the lender to demand repayment if the borrower transfers title to the property that serves as security for the mortgage. Lenders will generally permit a property to be put into the name of a revocable living trust, and allow a family member to be added to title, without triggering the due-on-sale clause. However, if you plan on doing any other re-titling of your property, into an LLC for example, you should check with your lender to make sure that the transfer will be permitted.
A right-of-way giving persons other than the owner access to or over a property.
An appraiser’s estimate of the physical condition of the building. The actual age of the building may be shorter or longer than its effective age.
A 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.
A homeowner’s financial interest in the property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage(s).
The Federal National Mortgage Association, known as Fannie Mae, is a congressionally chartered, public company that is the nation’s largest supplier of home mortgage funds. With it’s counterpart Freddie Mac, it is also known as a government sponsored entity, or GSE.
An agency of the US Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
A mortgage that is insured by the Federal Housing Administration (FHA). An FHA mortgage is a government mortgage, not a conventional mortgage.
Most lenders will have an option for a borrower who has already locked in an interest rate to renegotiate to a lower rate if interest rates have moved sharply lower since the time the loan was locked, but before loan documents have been prepared.
A mortgage in which the interest rate does not change during the entire term of the loan.
Insurance that compensates for physical damage resulting from flooding. It is required for properties located in federally designated flood areas. For more info go to floodsmart.gov, the official site of the National Flood Insurance Program.
The legal process by which a borrower in default under a mortgage loses his or herinterest in the mortgaged property. This usually involves a sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
An estimate of charges which a borrower is likely to incur in connection with a settlement.
Insurance protecting against loss to real estate caused by fire, some natural causes, theft, vandalism, etc., depending upon the terms of the policy.
High-balance conforming loans range from $417,00 up to $625,500, depending on the county in which you live. These are loans are underwritten to the guidelines of Fannie Mae and Freddie Mac. Pricing on these loans is sometimes, but not always, better than the pricing on jumbo loans, which are also available for these loan amounts.
A credit line that is secured by second deed of trust on a house. Equity lines of credit are revolving accounts that work like a credit card, which can be paid down or charged up for the term of the loan. The minimum payment due each month is interest only for an initial period, usually ten years.
A loan secured by a second deed of trust on a house. The interest rate on a HELOAN is fixed, and ayments on this loan include both principal and interest
A published interest rate to which the interest rate on an adjustable rate mortgage (ARM) is tied. The most commonly used index is the one-year LIBOR (London Interbank Offered Rate); the current rate on the 1-year LIBOR can be found in the Wall Street Journal here http://wsj.com/mdc/public/page/2_3020-moneyrate.html .
When you can expect the first rate adjustment of your ARM loan.
An impound account is an account established by the lender from which is paid a borrower’s property tax bills, and in many cases the homeowner’s insurance premium. The monthly cost of the property taxes and homeowner’s insurance are added to the borrower’s monthly mortgage payment, with the additional funds being held in the impound account and dispersed by the lender when payments are due.
Loan payments have two components, principal and interest. An interest only loan has no principal component for a specific period of time. These loans minimize monthly payment, improving cash flow.
The current loan limit for a conforming loan is $417,000; mortgages for amounts that exceed that limit are considered jumbo loans, and do not fall under the guidelines of Fannie Mae and Freddie Mac. See High-balance conforming loans.
A provision of an ARM that defines the maximum rate the loan can ever reach.
The unpaid principal balance of the mortgage on a property divided by the property’s appraised value. A lower LTV may result in a better interest rate or more favorable loan terms.
The amount of time that a lender will guarantee a loan’s interest rate, usually 30, 45 or 60 days.
The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment interval.
Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with a loan-to-value greater than 80%.
Loans are generally priced according to the interest rate; the lower the rate, the higher the fees. An origination fee on a loan at an interest rate of 4.00% might be TO BE LOOKED AT BY RICHRD
A purchase transaction in which the property seller provides some or all of the financing. If the seller is providing a second mortgage, this is often referred to as a seller-carryback.
Principal, interest, taxes and insurance – the components of a monthly mortgage payment.
One point represents 1% of the amount of the mortgage loan.
A charge imposed by a mortgage lender on a borrower who wants to pay off more than 20% of the principal balance on a loan during the prepayment penalty period. Prepayment penalties can range from six months up to five years, and the penalty, normally expressed as a percentage of the loan amount – i.e a 1.5% prepayment penalty – these penalties may also decline gradually during the prepayment period.
The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow.
An agreement guaranteeing the home buyer a specified interest rate and fees provided the loan is closed within the lock period.
The process of paying off one loan with the proceeds from a new loan using the same property as security.
If you are refinancing your first mortgage and have an existing second or home equity line, in order to keep that existing financing that lender must agree to “subordinate” to the new first mortgage.
Insurance against loss resulting from defects of title to a specifically described parcel of real property. In other words, if someone else turns up and says they own your property, or that they can build a driveway across it, or cut down your trees, title insurance protects your interest.
A government agency guaranteeing mortgage loans with no down payment to qualified veterans.