Adjustable Rate Mortgage. An adjustable rate mortgage, or ARM, is a mortgage loan with an interest rate that changes either monthly, quarterly, annually, or every three or five years, depending on the type of loan. The advantage of an ARM? Monthly payments are usually lower than a fixed-rate mortgage, at least initially. The disadvantage of an ARM is that monthly payments can go up suddenly if the Treasury bill rate increases, although usually there is a limit as to how much the interest rate can go up, known as a cap.

Annual Percentage Rate. An annual percentage rate, or APR, is the actual cost of a loan, including interest, points, mortgage insurance, and other fees. An APR is expressed as a yearly interest rate.

Assumable mortgage. An assumable mortgage is a mortgage that can be transferred from the person selling a property to the person buying the property. Once the mortgage is transferred to the buyer, the seller is no longer responsible for repaying it. With an assumable mortgage, there may be a fee and/or a pre-existing interest rate along with the mortgage.

Balloon mortgage. A balloon mortgage typically offers low rates for an initial period of time (usually five, seven, or 10 years) and, after that, the balance is due or the mortgage is refinanced by the borrower.

Bankruptcy. Bankruptcy is a legal process when a person admits an inability to pay debts. After bankruptcy is declared, the court appoints a trustee to distribute any remaining assets to the people/businesses who are owed money.

Bear market. When the stock market (in general) declines, it is called a bear market.

Bull market. When the stock market (in general) increases, it is called a bull market.

Cash reserves. When a person gets a loan or a mortgage, they need a down payment and closing costs. Sometimes the company or bank lending the money also wants the borrower to have additional money put away—a cash reserve—usually approximately two months’ worth of mortgage payments.

Credit bureau. Credit bureau score. When lenders need to know if a person applying for a loan will be able to pay it back, information is available from a credit bureau. A credit bureau score is highly predictive of a borrower’s future payment performance, based on the borrower’s current and past debt payment history.

Credit history. The history of an individual’s debt payment is called credit history. Lenders use this information to gauge a potential borrower’s ability to repay a loan.

Credit report. A credit record lists all of a potential borrower’s past and present debts and the timeliness of their repayment.

Debt-to-income ratio. The debt-to-income ratio is the percentage of a consumer’s monthly gross income that goes to paying debts, including some taxes, fees, and insurance premiums.

Declining balance. A declining balance is the ever decreasing amount owed on a debt, such as a mortgage loan, as monthly payments are made.

Default. Default is the inability or failure of a borrower to pay monthly mortgage payments when they are due, in accordance with the terms of a mortgage. Also called Delinquency

Equity. Equity is the owner’s financial interest in a property, calculated by subtracting the amount still owed on the mortgage from the fair market value of the property. If your house is currently worth $400,000, and you owe $150,000 on your mortgage, your equity would be $250,000. If you owe more than the property is worth, you have negative equity.

Family of funds. A group of mutual funds, with different objectives, managed by the same investment management company is called a family of funds. Shareholders in one of the funds can usually switch their money into any of the family’s other funds, sometimes at no charge.

• No load families: Families of funds with no sales charges.
• Load families: Families of funds with sales charges.

Federal Reserve. The Federal Reserve, sometimes called just the Fed, is the United States central banking system that issues money and performs services on behalf of financial institutions and the federal government.

FHA loan. An FHA loan is a loan insured by the Federal Housing Administration, open to all qualified home purchasers.

Fixed-rate mortgage. A fixed-rate mortgage has monthly payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change, as opposed to an adjustable rate mortgage.

Foreclosure. When the owner of a property can no longer make monthly mortgage payments, the property goes into foreclosure, meaning that the property is taken away from the owner and sold off to pay the remainder of the loan.

Gross domestic product. The gross domestic product, or GDP, is the value of goods and services created within an economy. The GDP equals national product minus income from abroad.

Gross national product. The gross national product, or GNP, is the total value of all goods and services produced by a country. Real growth in GNP measures the increase in output after making adjustments for inflation.

Index. “Index” is a measurement of changes in the economy, and is used by lenders to determine increases or decreases to the interest rate charged on an adjustable rate mortgage.

Loan-to-value ratio (LTV). The loan-to-value, or LTV, is a percentage calculated by dividing the amount borrowed for the purchase of a property by the price or appraised value of the property. The higher the LTV, the less cash a borrower is required to pay as a down payment.

Loss mitigation. Loss mitigation is a process to avoid foreclosure. The person or institution lending money tries to help the person who has been unable to make loan payments and is in danger of defaulting on his or her loan.

Mortgage insurance. Mortgage insurance protects money lenders against the losses they might have if a borrower can’t pay back the money. Mortgage insurance is required mostly for borrowers who make a down payment of less than 20% of the price of the property.

Refinancing. Refinancing is paying off one loan by getting another loan, generally to get a lower interest rate.

Sub-Prime Loan. A sub-prime loan has less strict terms and conditions. Due to the higher risk, sub-prime loans charge higher interest rates and fees to the borrower.

Treasury Bills. Debt obligations of the United States Treasury that will mature, or expire, in one year or less

Trustee. A trustee is a person appointed to supervise legal transactions when an individual or company files for bankruptcy.

© Harris, Rothenberg International, Inc.

Reviewed 07/10