Financial Terms

Adjustable Rate Mortgage (ARM):
A mortgage with an interest rate that changes over time in line with movements in the index. ARMs are also referred to as AMLs (adjustable mortgage loans) or VRMS (variable rate mortgages).

Adjustment Period:
The length of time between interest rate changes on an ARM. For example, a loan with an adjustable period of one year is called a one-year ARM, which means that the interest rate can change once a year.

Amortization:
Repayment of a loan in equal installments of principal and interest, rather than interest-only payments.

Annual Percentage Rate (APR):
The total finance charge (interest, loan fees, points) expressed as a percentage of the loan amount.

Cap:
The limit on how much interest rate or monthly payment can change, either at each adjustment or over the life of the mortgage.

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:
A procedure in which a third party acts as a stakeholder for both the buyer and the seller, carrying out both parties’ instructions and assumes responsibility for handling all of the paperwork and distribution of funds.

FHA Loan:
A loan insured by the Insuring 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 FHNA 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.

Graduated Payment Mortgage:
A residential mortgage with monthly payments that start at a low level and increase at a predetermined rate.

Index:
A measure of interest rate changes used to determine charges in the ARM’s interest rate over the term of the loan.

Loan Commitment:
A written promise to make a loan for a specific 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.

Negative Amortization:
Negative amortization occurs when monthly payments fail to cover the interest costs. The interest that isn’t covered is added to the unpaid principal balance, which means that even after several payments you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that aren’t high enough to cover the interest.

Origination Fee:
A fee or charge for work involved in evaluating, preparing, and submitting a proposed mortgage loan. The fee is limited to 1 percent for FHA and VA loans.

PITI:
Principal, interest, taxes and insurance. Lenders use these 4 items to calculate the monthly housing costs of a prospective borrower.

Point:
An amount equal to 1 percent of the principal amount of the investment or note. The lender assesses loan discount points at closing to increase the yield on the mortgage to a position competitive with other types of investments.

Prepayment Penalty:
A fee charged to a mortgagor who pays a loan before it is due. Not allowed for FHA or VA loans and prohibited in some states.

Private Mortgage Insurance (PMI):
Insurance written by a private company protecting the lender against loss if the borrower defaults on the mortgage.

VA Loan:
A loan that is partially guaranteed by the Veterans Administration and made by a private lender.