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glossary of
terms |
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| Adjustable Rate Mortgage (ARM) |
Also known as an adjustable rate loan, or
adjustable, these loans have interest rate and payments which adjust
periodically (Click here for a detailed explanation of characteristics and an example of how these adjust). |
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| Annual payment cap | This is the maximum amount that a payment can be increased on an adjustable. Adjustables with monthly rate adjustments feature an annual payment cap. This is usually limited to 7.5% above the minimum monthly payments for the previous year. For example, if your minimum payments during year 1 are $2,500, your minimum payments during year 2 would be $2,500 x 1.075%= $2,687. |
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| Closing costs | These are the total loan fees to take out a loan. This may include: points, title insurance, escrow, processing, appraisal, notary, and loan documents. |
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| Deferred interest payment | Known as minimum payments, this feature of an adjustable calls for payments which are less than the payment required to payoff the loan in equal monthly installments (fully amortized payment). The difference between the fully amortized payment and the deferred interest payment is added to the loan balance. This is known as negative amortization or interest accrual. |
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| Eleventh District Cost of Funds Index (COFI) | This is the weighted average cost of funds for banks (most were formerly savings and loans) located in the 11th District of the Federal Home Loan Bank Board. This comprises a number of Banks in California, Arizona and Nevada. COFI reflects the rates that banks must pay to depositors in order to attract funds to lend. (Click here for more details and an example) |
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| Escrow | A neutral third party who carries out the instructions for the parties to transaction. For a refinance transaction, this would be the borrower and lender. For a purchase transaction, this would also include the current property owner as well. Escrow duties include but are not limited to: ordering loan payoff statements, and evidence of hazard insurance, providing a financial accounting of the transaction and preparing and causing to record various documents. |
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| Also known as a fixed rate loan, these call for a rate to be fixed throughout the duration of the loan. The common terms on these are 15, 20, and 30 years. | |
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| This is the sum of index value and margin expressed as a percentage. For example, an index value of 6% plus a margin of 3% would equal a fully indexed rate of 9%. | |
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| Index | This is the reference point or benchmark used to periodically reset the rate on an adjustable rate loan. The (5) most common indices are: the 12- Month Treasury Average (12MAT), Eleventh District Cost of Funds (COFI), 1 -Year Treasury, 6- Month Certificate of Deposit and 6- Month LIBOR. (Click here for a more details and an example: Refer to Anatomy of an Adjustable) |
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| Interest only payments | The amount that equals the interest portion of the loan. Monthly interest only payments are derived by the following formula: Principal x rate x time all divided by 12 months. Thus, for a $500,000 at 7% per year this would be $500,000 X .07 x 1 year/ 12 months= $2,917 per month. |
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| Introductory rate | Also known as a start rate or teaser rate, these are offered on adjustable rate loans as an enticement to borrowers to take on the interest rate risk of an adjustable. These rates typically range from 3.95%-8% and typically last from 1-12 months. (Click here for more details and an example: Refer to Anatomy of an Adjustable) |
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Also know as the London Interbank Offer Bank, this is the yield paid on US dollar deposits for 90 day terms in European money center banks. (Click here for more details and an example) |
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| Loan to value ratio (LTV) | This is the percentage that the loan represents of either the appraised value for a refinance transaction or the purchase price for a sale transaction. For example, if the loan amount is $300,000 and the home appraised for $400,000, the LTV would be 75%. |
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| Margin | This is the spread, expressed as a percentage that is added to the index value to periodically re-set the rate on an adjustable rate loan. Margins can range from -5% to 7% with the most falling between 2%-3%. (Click here for more details and an example) |
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| Also known as a lifetime rate cap, this is the maximum amount the interest rate can be increased to for an adjustable rate loan. | |
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| One Year Treasury Index | This is the yield paid by the US Treasury Department to borrow funds. A close proxy for this is the One Year Constant Maturity Treasury or Treasury Spot Indices. (click here to see a graph of the Constant Maturity Treasury) |
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| Points | These are part of the total loan fees and are expressed as a percentage of the loan amount. For example, 1point equals 1% of the loan balance. Thus, for a loan of $500,000 1point would equal $5,000. |
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| Adjustable rate loans call for periodic interest rate adjustments. These can be monthly, quarterly, semi-annually and annually. | |
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| This is the maximum amount the rate can change between adjustment periods on an adjustable rate loan. These usually range from 1% for adjustables with semi annual rate adjustments to 2% for adjustables with annual adjustments. | |
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| This is the reference rate charged by Banks for commercial loans and some real estate loans. ( click here to see a graph of this index) | |
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| This is the yield paid by large US banks for $100,000 deposits for a term of 6 months. | |
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| This is an insurance policy to insure a lender and property owner against defects that may effect title to property. Underwriting guidelines require this in order to make a loan. | |
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| A legally binding agreement, which serves as a security device to perfect a loan, secured by real estate. The three parties to a trust deed include: the trustor (borrower), beneficiary (lender) and trustee. The trustee, on behalf of the beneficiary holds the trust deed, until the loan is paid off. In the event of nonpayment or other breaches of contract, the holder of a first trust deed would have a priority claim for recovery over that for a holder of a 2nd or 3rd trust deed. | |
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| Also known as the Monthly Treasury Average, this is a 12 month rolling average of US Treasury Securities adjusted to a constant maturity of one year as made available by the Federal Reserve. The 12- month average is determined be adding together the annual yields for the most recently available 12 months and dividing by 12. (click here to see a graph of this index). | |
