Adjustable Rate Mortgages (ARMs): A mortgage with an interest rate that changes periodically. The changes are typically tied to an industry-wide index, such as the Prime Interest Rate. When the underlying index goes up, your monthly payments will increase; when the underlying payments go down, your monthly payments will decrease. Many adjustable rate mortgage also include an initial period where the interest rate is fixed, e.g., a 7/1 ARM would feature a fixed rate for the first 7 years of the mortgage, and an adjustable rate that re-adjusts each year thereafter.
Appraisal: A professional estimate of the current market value of a property. Required by most lenders to obtain a loan.
ARM: Acronym for “Adjustable Rate Mortgage.”
Balloon Mortgage: A mortgage that requires a lump-sum payment at the end of the term of the mortgage.
Cash-Out Refinance: When a property owner refinances and borrows more than what is currently owed on the property, generating additional cash for other needs. For example, a property owner could have a $100,000 mortgage on a $200,000 property. The property owner could replace this mortgage with a $150,000 mortgage — $100,000 would pay off the previous mortgage, and $50,000 would be the “cash out” portion of the mortgage.
Conforming Mortgage: A mortgage up to $417,000. Qualifying requirements and underwriting methods for conforming mortgages are standardized.
FHA Loan: Also known as an “FHA Insured Loan.” A loan in which the Federal Housing Administration insures the lender against losses due to your default.
First Mortgage: The mortgage that has first claim on a property in the event of a default. First Mortgages have priority over Second Mortgages (see below).
Fixed Rate Mortgage: A mortgage with an interest rate that remains constant over the life of the mortgage. Your monthly payments will remain constant throughout the life of the mortgage as well. “30-year fixed” loans means the interest rate on the loan will be fixed and, at the end of 30 years, the loan will be fully paid off; “15-year fixed” loans means the interest rate will be fixed and, at the end of 15 years, the loan will be fully paid off. (see also: Fixed Rate vs Adjustable Rate Mortgages)
Fully-Amortizing Loan: A loan which has monthly payments that consist of both interest and principal. The principal steadily decreases such that, at the end of the term of the loan, the principal balance is zero, and the loan is fully paid back.
Home Equity: The difference in the fair market value of your property and the total mortgage balance on the property.
Home Equity Line of Credit (HELOC): A financial instrument that gives you the option (but not the obligation) to borrow up to a certain amount, secured against equity in your home. A HELOC is similar to a credit card – you have a maximum credit line available to you, you may have an outstanding balance, and the balance accrues interest. HELOCs differ from credit cards because the interest incurred may be tax deductible, and because the credit line is secured against your home equity, the interest rates charged are typically lower than credit card rates. HELOCs are commonly used for home improvements, major purchases or expenses, and consolidation of more expensive debts.
HELOC: Acronym for Home Equity Line of Credit.
Home Equity Loan: A loan which is secured by the home equity you have already built up in your home. Interest on a home equity loan is typically tax deductible and can be used to pay off more expensive loans (like credit card debt) that do not have tax deductible interest. Consult a tax advisor to determine if you may qualify.
Home Improvement: Home improvement is the process of renovating, modifying, or making additions to a home. Home improvement is a costly affair that necessitates some type of financing. Any loan offered to homeowners in which the home is used as security is called a home improvement loan.
Interest-Only Mortgage: A mortgage that has a minimum monthly payment equal to the interest on the loan. Many interest-only mortgages are interest-only for a fixed period of time, after which monthly payments increase to pay both interest and principal.
Jumbo Mortgage Loan: Jumbo mortgages are home loans at amounts higher than the prevailing conforming loan limit. They currently range from $417, 000 to $729,500, depending on your geographic location.
Loan-to-Value Ratio (LTV): The ratio that measures the size of a mortgage to the value of the underlying property. For example, a $180,000 mortgage on a property that has a market value of $200,000 has an LTV of 90%. Lenders may choose to lend up to a certain maximum LTV ratio.
Mortgage: A loan secured by real estate.
Negative Amortization Mortgage: A loan which allows your initial monthly payments to be lower than the actual interest due, thereby increasing the total balance of the mortgage. Negative amortization loans allow borrowers to have lower monthly payments in the short-term, but, in the long term, monthly payments will probably increase significantly. Negative amortization loans may also lead to a steady decrease in home equity, especially if the market value of the property does not increase as fast as the mortgage balance is increasing.
PITI: Acronym for principal, interest, taxes and insurance, the components of your monthly mortgage payment. Some mortgage only require payment of principal and interest. (Taxes and insurance still need to be paid, but are not bundled together with your monthly mortgage payment.)
Points: An amount paid up-front at the start of a mortgage to decrease the rate of the mortgage. A point is 1% of the value of the mortgage. Also called “Discount Points.”
Refinance or Refinancing: When an existing mortgage is replaced by a new mortgage. Reasons to refinance might be to lower your monthly payment, lock in a fixed rate for the long term, or generate additional cash for other needs.
Second Mortgages: A mortgage on real estate which already has been pledged as collateral on a first mortgage. The second mortgage carries rights which are subordinate to those of the first mortgage, in the event of default. As such, second mortgages typically have higher interest rates associated with them. For example, if you want to buy a home for $200,000 and can only afford a $20,000 down payment (10%), and the lender requires a 20% down payment, you could take out a second mortgage for the remainder of the down payment.
Super-Jumbo Mortgage: Mortgages over $650,000.
VA Mortgage / Loan: A loan which the Veteran’s Administration insures the lender against losses due to default. Available only to eligible veterans.
Adjustable Rate Mortgage (ARM)
An Adjustable Rate Mortgage is a common mortgage loan with a varying interest rate that adjusts on a periodic basis (typically every three years or annually after the fifth year), which alters the monthly payment due.
Annual Percentage Rate (APR)
This is the total cost of your mortgage payments every year (including all interest, points and fees) expressed as a percentage of the loan.
The first mortgage is the primary mortgage on a property. When a property has multiple mortgages on it, the lender with the first mortgage is the one paid first.
Fixed Rate Mortgage
This is a mortgage whose interest rate never changes. The rate is fixed at the time of the loan approval.
Home Equity Line of Credit (HELOC)
The HELOC is a rotating line of credit given to a borrower allowing him to use the equity in his home as collateral. It is repaid with interest over time.
Home Equity Loan
A loan secured by a primary residence or second home to the extent of the excess of fair market value over the debt incurred in the purchase.
Loan to Value Ratio
This is the difference between the remaining balance of your loan and the value of your home.
Points are the fees you pay at the time of closing to reduce the loan’s interest rate. One point equals 1% of the loan value.
This is a penalty that a borrower must pay if his loan is refinanced early or paid off early. Typically the penalty expires after a certain number of payments are made.
Refinance / Refinancing
“Refi” or refinancing is the process of paying off previous mortgages by getting a single loan with a much lower interest rate.
This is a mortgage more commonly referred to as a home equity loan.
General Disclaimer: The articles on this website are for informational purposes only and should not be used as a substitute for legal advice.