Mortgage Glossary Part 2

Balance Sheet

A financial statement that shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage

A long-term loan, often a mortgage, that has one large payment (the balloon payment) due upon maturity. A balloon loan will often have the advantage of very low interest payments, thus requiring very little capital outlay during the life of the loan



Biweekly Payment Mortgage

A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.

Bridge Loan

Short-term financing which is expected to be paid back relatively quickly, such as by a subsequent longer-term loan. also called swing loan or bridge financing.

Buydown

When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.


Certificate of Eligibility

A government-issued document which indicates that a member of the armed forces who serves a certain number of days and is honorably discharged can apply for a Veterans Administration (VA) loan, such as a VA mortgage.


Closing Costs

These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

Compound Interest

Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Compound interest differs from simple interest in that simple interest is calculated solely as a percentage of the principal sum.

Conversion Clause

A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.


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Mortgage Glossary Part 1

2/1 Buy Down Mortgage

The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.

Acceleration Clause

A provision that allows a lender to demand payment of the total outstanding balance or demand additional collateral under certain circumstances, such as failure to make payments, bankruptcy, nonpayment of taxes on mortgaged property, or the breaking of loan covenants.


Adjusted Basis

The base price of an asset or security that reflects any deductions taken on or improvements to the asset or security, used to compute the gain or loss when sold.

Affordability Analysis

An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.

Amortization

The gradual repayment of a mortgage loan, both principal and interest, by installments.


Annual Percentage Rate (APR)

Annual Percentage Rate. The yearly cost of a loan, including interest, insurance, and the origination fee (points), expressed as a percentage. Often applied to mortgages, credit cards, and automobile financing.
Appraisal

A written analysis prepared by a qualified appraiser and estimating the value of a property.

Appraised Value

An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.


Assumability

A mortgage that can be transfered with no change in terms. If an assumable mortgage is transferred, the buyer assumes all responsibility for repayment. The original lender must agree to the transfer of an assumable mortgage.


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Types of Loans

Thirty-Year Fixed Rate Mortgage

A 30 year fixed mortgage is possibly the most common type of mortgage loan. It has several characteristics that make it such a popular choice when financing a home purchase.

One of the key features of a 30 year fixed mortgage is its fixed interest rate. When you acquire the loan, the interest rate that you get at that time is the interest rate that you keep for the duration of the loan. Your only option to change the interest rate is if you choose to refinance. If you are able to lock a great interest rate when getting the mortgage, you are set. That is the rate for the next 30 years, assuming that you own the house that long.


Adjustable Rate Mortgages (ARM)

ARM. A mortgage with an interest rate that may change, usually in response to changes in the Treasury Bill rate or the prime rate. The purpose of the interest rate adjustment is primarily to bring the interest rate on the mortgage in line with market rates. The mortgage holder is protected by a maximum interest rate (called a ceiling), which might be reset annually. ARMs usually start with better rates than fixed rate mortgages, in order to compensate the borrower for the additional risk that future interest rate fluctuations will create.

2/1 Buy Down Mortgage

The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.

Negative Amortization (Neg. Am) Loan

A gradual increase in mortgage debt that occurs when the monthly payment is insufficient to cover the interest due, and the balance owed keeps increasing (at least in the first few years).

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