Terms Lenders Use
(or Words Your Mother Never Taught You) |
|
Convertible
Adjustable
Loans |
Adjustable
Rate Loans
(ARM's) |
Negative
Amortization |
Index |
Adjustment
Period |
Fixed
Rates |
Temporary
Buy-Downs |
Balloons |
PMI |
Caps |
| AVM |
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| Fixed Rates |
A conventional fixed-rate mortgage has a set interest rate and payments that do not change during the life or "term", of the loan. A conventional loan is fully paid off over a given number of years, usually 15, 20 or 30. Part of each payment pays back the money you borrowed, (principal), and the rest the lender's income from making the loan, (interest). The value of the house, over the balance of the mortgage (including your down payment) is your equity. If your house is worth $100,000 and you owe $85,000 then you have 15% equity in your house. |
| Temporary Buy-Downs |
- The term Buydown refers to a borrower buying down the interest rate on a loan. Along the lines of paying points on a loan, points reduce the rate of the loan for the term, while a buydown is just a temporary reduction.
The temporary buydown lowers the rate for the first few years, starting at a lower interest and building to the original loan rate. The loan rate is lower for the first years, as are the payments. This allows the lender to qualify the borrower for the loan at the reduced rate.
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| Balloon Loans |
This is a conventional, fixed-rate mortgage which is typically paid as if it were a full 20 or 30 year mortgage. However, at the end of the term - one year, five years, seven years, the full principal is due. |
| AVM |
AVMs are statistically based computer programs that use real estate information such as comparable sales, property characteristics, tax assessments, and price trends to provide an estimate of value for a specific property. |
| Adjustable Rate Loans (ARM's) |
An "ARM", or "Adjustable Rate Mortgage" has an interest rate that adjusts within a prescribed schedule and the changes payment amounts. In most ARMs, the rate is fixed for a certain period and then adjusts up or down with the factors (See Index) to which it is tied. |
ARM's Terms |
| Adjustment Period |
A 3/1 ARM has a fixed rate for the first three years of the loan and is then adjusted once every year through the term of the loan to reflect the current economic conditions; a 5/1 ARM is fixed for the first five years of the loan and is then adjusted once a year for the term of the loan. |
| Caps |
This is the maximum allowed in the ARM loan for individual and cumulative interest rate adjustments. A 2/6 cap, allows the interest rate on to go up or down by no more than two percent every adjustment period, and has a total limit of six percent. So 2/6 cap on a 6.5% ARM allows a maximum rate of 12.5%. |
| Index |
The basis that lenders use to adjust the interest rate on ARMs. ARMs are quoted on a first-year rate, and expressed as an index plus a margin. A 5/1 ARM may be advertised at 6% with a 2.5% margin over the U.S. 30-year bond index.
5/1 ARM
2.5% Margin |
30 Year Rate
Bond Index |
Plus
Margin |
Interest
Rate |
| 1st Year |
6% |
|
6% |
| 2nd through 4th Years |
7% |
2.5 |
8.5 |
| Fifth Year |
7.5% |
2.5 |
10% |
The first year's rate would be 6%. The second year, the rate would be 2.5% over the 30-year bond rate, say 7%, making the rate through year five 9.5%. In the fifth year, the rate is adjusted again, 2.5% over the current 30-year bond rate, now 7.5%, making the new rate 10%. |
| Negative Amortization |
A loan is in negative amortization when interest rates adjustments upwards along with payment caps result in a payment that doesn't meet even the interest on the loan. What is owed and not paid is added back to the mortgage, creating a negative amortization. An around about way of saying an addition to the debt. |
| Convertible Adjustable Loans |
Convertible ARMs allow the conversion from an ARM to a fixed-rate mortgage at certain times during the mortgage. |
| If you really want an ARM, consider all these factors |
What would the interest rate be fully adjusted? Is there any prepayment penalty? How much and for how long? When will the rate adjust? How much will it adjust? On the next adjustment? Over the term of the loan? |
