Definitions of mortgage terms
One-year adjustable--Mortgage whose annual rate changes
yearly. The rate is usually based on movements of a published
index plus a specified margin, chosen by the lender.
Lock--Lender's guarantee that the
mortgage rate quoted
will be good for a specific number of days from day of application.
Index--A floating index lenders use
to calculate the rate
on a one-year adjustable-rate mortgage. The most common indexes
are the one-year Treasury Constant Maturity Yield and the FHLB
11th District Cost of Funds.
Caps--The maximum amount the
mortgage rate can change
annually or over the life of the loan on a one-year adjustable.
For example, if the caps are 2% annual and 6% life of loan, a
mortgage whose first-year rate is 10% could rise to no more than
12% the second year and 16% over the entire loan term.
Margin--The number of percentage
points added to the index
on a one-year adjustable. For example, if the index rate is 9%
and the margin is 3%, then the fully-indexed rate is 12%.
Points--A percentage of the loan
amount, paid at closing.
Each point is one-hundredth of the loan amount.
Indexed rate--The sum of the
published index plus the
margin. For example if the index were 9% and the margin 2.75%,
the indexed rate would be 11.75%. Often, lenders charge less than
the indexed rate the first year of an adjustable-rate mortgage.
Annual Percentage Rate (APR)--
Interest rate reflecting
the first-year rate including certain points and credit costs.
COFI--Adjustable-rate mortgage
with rate that adjusts
based on a cost-of-funds index, often the 11th District Cost of
Funds.
Buydowns--Mortgage in which the
rate is offset by paying
more points up front.
7/23 and 5/25 Mortgages--
Mortgages with a onetime rate
adjustment after seven years and five years respectively.
3/1, 5/1, 7/1 and 10/1 ARMs--
Adjustable-rate mortgages
in which rate is fixed for three-year, five-year, seven-year and
10-year periods, respectively, but may adjust annually after that.
Balloon--Loan in which little, if
any, of your monthly
payments go toward paying off the outstanding balance. Rather,
one large, lump-sum payment is due at maturity.
Jumbo Mortgages--Mortgages that
go over the $252,000 Fannie
Mae and Freddie Mac limit.
Loan-to-Value Ratio--Proportion
of a home's value upon
which an institution will issue a loan.
Negative Amortization--When, on
an adjustable-rate mortgage,
interest rates increase faster than monthly payments. Result:
Your balance may grow despite efforts to pay it down.
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All material herein is the product of Compass Financial Services, Inc c.1997