Adjustable rate mortgage (ARM)
Adjustable rate mortgages are called ARMs for short. The interest rate is changed periodically in accordance with the loan agreement. For example, the loan agreement may state that the rate on a 1-year ARM is reset every September 1st after an initial period of 3 years. The interest rate is calculated by adding a margin to a specific index. The index is an indicator that is tied to the economy and will fluctuate as general interest rates fluctuation. There are many different types of indexes that may change weekly, monthly, annually, etc. The specific loan agreement specifies the index. Some indexes commonly used with ARMs are Treasury bills (T-bills), COFI (Cost of Funds Index), and LIBOR (London InterBank Offered Rate). For example, if the margin for an ARM is set at 3 percentage points and the yield on a 1-year T-bill is 6%, the ARM's rate will be adjusted to 9%. ARM loans usually have provisions (called 'caps') that limit how much the loan rate can increase at one resetting and over the term of the loan.
Adjustment period
The adjustment period is the frequency that the lender adjusts the interest rate on a variable-rate mortgage loan. For example, a 1-year ARM would have an adjustment period of 1 year.
Amortization
Amortization is the gradual reduction of loan principal that occurs as a loan is repaid, with an increasing amount of each payment applied to principal and a lesser amount applied to interest. Amortization is also a process of spreading a cost that is incurred upfront over the term of the loan or life of the asset.
Annual Fee
A yearly cost charged in connection with maintaining a home equity line of credit.
Annual percentage rate (APR)
The real cost that you pay to borrow, stated as a yearly percentage of the loan amount. This is sometimes called your effective borrowing cost. For mortgage loans, closing costs and discount points are added to calculate APR. For example, if you pay $500 in closing costs to obtain a $10,000 loan, the APR will be higher than the interest rate since you are effectively borrowing $9,500 but will owe $10,000. The Federal Truth in Lending Act requires the lender to disclose the APR to you.
Appraisal
Appraisal is the process of estimating the fair market value of an asset. Appraisals are routinely required for real estate transactions. An appraiser should be a certified professional, and he or she must be an independent party to the transaction in order to avoid potential conflict of interest. Real estate appraisers use methods that are common in local practice, such as the comparable-sales method.
Appraisal value
Appraisal value is the market value of an asset that is derived from the appraisal process. Depending on the asset, the method used to appraise the asset will differ. For homes, appraisers often use the comparable sales method that incorporates recent sales data of comparable homes. They may also use the replacement method, which is the cost to replace the home at today's prices.
Appreciation
Appreciation is the increase in the value of an asset, measured in dollars or as a percentage. For example, an investment that rises in price to $25 from $20 has appreciated 25%.
Appreciation rate
Appreciation rate is the yearly percentage rate that an asset increases in value. For example, a home that sold for $150,000 three years ago that is now worth almost $200,000 had an average appreciation rate of 10%. After the first year, the home was worth $165,000. After the second year, the home was worth $181,500. And after the third year, the home is worth a little under $200,000.
Assessed value
The city, township or county that you live in may charge you real estate taxes. If so, it probably sets a tax rate for each square foot of land in the lot you own. This is the assessed tax rate. To calculate the assessed value, multiply the assessed rate times the size of your lot. For example, if Township Taxing Authority charges a real estate tax of $.05 per square foot, and your lot size is 20,000 square feet, the assessed value of your lot is $1,000.
Assumption
An agreement between a buyer and seller whereby the buyer assumes the payments on an existing mortgage from the seller.
Average yearly tax savings
To estimate your average yearly tax savings of owning a home, the following approach can be used: 1) Add the mortgage interest expense over the term of the loan and any other tax-deductible expenses. Closing costs are considered a tax-deductible expense. You may have to amortize these expenses over the loan term instead of deducting them in the first year. 2) Multiply the amount of expenses by a factor that is equal to one minus your combined tax rate. This amount is your total tax savings over the term of the loan. 3) Divide total tax savings by the number of years you own the home to estimate your average yearly tax savings. (Consult a tax professional.)
Balloon loan
A mortgage in which monthly installments are not large enough to repay the loan by the end of the term. As a result, the final payment due is the lump sum of the remaining principal. Some balloon mortgages have an option to 'reset' on the balloon maturity date. These loans have terms of five or seven years and the option allows the borrower to extend the term of the loan for 23 or 25 years. The interest rate is adjusted for the reset and is calculated based on an index disclosed to the borrower at closing with his/her original documents.
Balloon payment
The final lump sum due at the end of the balloon loan or mortgage.
Base rate
The interest rate that is used as a benchmark to set the interest rate for borrowers. A base rate is sometimes called an index rate. For example, if you obtain a one year adjustable rate mortgage, your loan rate will be reset once a year to a rate that equals the loan rate plus a margin. Interest rates on credit cards are frequently tied to a change in the prime rate, another popular base rate used in consumer lending.
Basis point
A basis point is 1/100 of a percentage point. Interest rates and bond yields are often stated in basis points. For example, if commercial banks raised their prime rate on loans by 25 basis points, it would mean they raised their prime lending by one-quarter of a percentage point.
Borrower
An individual who applies for and receives a mortgage loan.
Buy down
A buy down is the prepayment of interest the lender uses to subsidize the borrower's monthly payment. Usually, a builder or seller will remit a lump sum that is paid directly to the lender. For instance, as an incentive to prospective buyers, a homebuilder will deposit funds into an account controlled by First Horizon Home Loans. First Horizon will then credit the borrower's monthly payment (with the builder's funds) for a specified number of years (usually two to three years).
Cap
The maximum rate to which a variable-rate mortgage can increase during the life of the loan.
Capital gain
A capital gain is an increase in the value of a capital asset that you own. A capital gain is calculated as the sale price of the asset minus the basis of the asset. Basis is usually the price you paid for the asset including transaction costs. Capital gains are taxed at different rates depending on how long the asset is held. A long-term capital gain occurs if you hold the stock, bond, or other security for more than one year. A short-term capital gain occurs if you hold the security for one year or less. Long-term capital gains are taxed at a lower tax rate, in part to reward investors for their patience. Short-term gains are taxed as ordinary income.
Cash-out Refinance
A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose. (Some states have restrictions on cash-out refinances, check with your First Horizon loan professional for details.)
Closing
Closing is the final stage of the loan process that requires an exchange of any funds due the other party and any signatures required for recording the transaction. Closing costs are paid at the closing.
Closing costs
Closing costs are the total expenses that the buyer pays at the time a real estate transaction is completed. This stage of the transaction is called closing. Closing costs may include origination fee, points, prepaid homeowner's insurance, appraisal fee, underwriting fee, processing fee, tax service fee, recording fee, title search and insurance, flood certificate fee, credit report fee, recording fee, tax adjustments, agent commissions, and private mortgage insurance (required if your down payment is less than 20% of the home's price.) For home mortgage loans, closing costs generally range between 3 and 6% of the home's purchase price.
Co-borrower
An individual who, together with a borrower, applies for and receives a mortgage loan.
Collateral
Collateral is an asset that is used to secure the repayment of a loan. For example, if a borrower defaults on an auto loan, the lender has the right to sell the vehicle in order to collect on the loan. The same principle works on most mortgage loans, which are collateralized by the homes that the loans are used to buy.
Combined loan-to-value ratio (CLTV)
Combined loan-to-value ratio is a key factor in determining the amount of a home equity loan you may qualify for. To calculate, divide the combined mortgage balance amount by the fair market value of the home. A recent appraisal is generally required to determine fair market value. For example, if you take out a $50,000 home equity loan, and add it to your existing mortgage loan balance of $150,000, your combined balance is $200,000. Divided by the home's appraised fair market value of $225,00, your CLTV is almost 89%.
Commission
A commission represents a share of the value of a transaction to compensate an individual responsible for the transaction. For example, a real estate broker may receive a 6% commission for selling a residence. The commission represents 6% of the sale price. Some employers use a compensation system based, in part or whole, on commissions. Since commissions are usually linked to generating revenue, salespersons often receive some or all of their compensation from commissions.
Condominium (condo)
A form of real estate where you own title to your living space and share in ownership of the title to the land and any common areas. Your share of the land and common area is proportional to the number of other condo owners and the sizes of their living units. A condominium association is often formed to manage the day-to-day operations of a condo, such as providing maintenance, collecting association dues, and paying real estate taxes.
Conforming mortgage loan
A conforming mortgage loan is eligible for purchase by Freddie Mac and Fannie Mae®, two government-sponsored enterprises. They may repackage it as a security and sell it to investors. A non-conforming loan is for a larger amount and is often called a jumbo loan. For 2005, the conforming loan limits for single-family homes is $359,650. For Alaska and Hawaii, the conforming loan limit is $539,475.
Conversion option
A conversion option allows the lender to convert from an adjustable rate mortgage (ARM) to a fixed rate mortgage during a specified time period. Many conventional ARM loan products contain a conversion option. If the borrower does not exercise the option to convert during the specified time period, the mortgage will remain as an ARM for the term of the loan.
Cost of Funds Index (COFI)
An index that is used to determine interest rate changes for certain adjustable rate mortgages (ARMs). It is based on the cost of savings, borrowings, and advances of the institutions that comprise the index.
Counter-offer
An offer that follows a buyer's initial offer. The initial counter-offer may come from the seller or buyer. If the seller makes the initial counter-offer, it is to lower the price to meet the buyer's initial offer. For example, if a buyer offers $100,000 for a home that is listed at $110,000, the seller may counter-offer at $105,000. If the buyer makes the first counter-offer, it is to raise the initial offer. For example, if a buyer offers $100,000 for a home that is listed at $110,000 and the seller ignores the offer, the buyer may counter-offer at $105,000. Once a counter-offer is made, successive offers from either side are considered counter-offers. After a series of counter-offers, a mutually acceptable sale price is usually reached.
Credit history
An historical record of whether you pay your bills on time or are delinquent. Your credit report reflects your payment history. A delinquent payment is past due 30 days or more.
Credit limit
The maximum amount that can be borrowed on a home equity line of credit or credit card.
Credit line pricing
The interest rate charged on a home equity line of credit is usually based on the U.S. commercial prime rate, which is the rate that major U.S. banks charge their best customers. For instance, if a credit line rate is the prime rate plus 2 percentage points, and the prime rate is 8.5%, the credit line annual interest rate is 10.5%.
Credit report
A credit report is a summary of an individual's credit history. It includes loan payment histories, late payments, existence of liens or other encumbrances, debt forgiveness, bankruptcy filings, and number of inquiries by prospective lenders.
Credit score
A credit bureau calculates your credit score and submits it to a lender to assist in making a credit decision. The credit bureau uses software from Fair, Isaac and Co. to calculate the score (as a result, a credit score is also called a FICO score). Your credit score is one determinant of a lender's credit decision. The lender also adheres to loan-approval guidelines that are set by the company itself. Credit scores do not have information on your age, gender, color, religion, marital status, and employment. Other factors, such as your employment history, are also excluded. According to Fair, Isaac and Co., about 20% of FICO scores are in each of the following ranges: below 620, 620-690, 690-745, 745-780, and 780 and above.
Credit scoring
The act of a credit bureau calculating your credit score using software provided by Fair, Isaac and Co. According to statistics from Fair, Isaac, and Co., about 20% of credit scores are in each of the following ranges: below 620, 620-690, 690-745, 745-780, and 780 and above.
Creditor
A creditor is a lender, or someone to which you are financially indebted. A creditor can be either an institution or individual. Institutional creditors include banks, credit card companies and bond investors.
Credit-worthy
A term used by lenders to describe an individual's eligibility to borrow money.
Debt ratio
Lenders use a debt ratio (also called debt to income ratio) to approve loan applicants. Debt ratio equals combined monthly debt payments divided by gross monthly income. For example, combined monthly debt payments of $2,000 divided by a gross monthly income of $4,000 equals a debt ratio of 50%.
Deed
The legal document that transfers ownership of a piece of property (in some states). The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of that state where they property is located, and should be delivered to the buyer at closing. There are two parties to the deed: the grantor and the grantee.
Delinquent
A status that suggests to a lender that you are late in paying your debts. Being delinquent on your debts often means being more than 30 days late twice or 60 days late once. Being delinquent often means your account is handed over to a collection agency for collecting payment. This step undermines your credit history.
Disbursement
Disbursement is the process of providing funds to the borrower. A credit line that is fully disbursed is one where the borrower has borrowed all that he or she is authorized to borrow. Construction loans are often disbursed in increments as the construction project is completed in stages.
Discount
Discount is a price that is less than the regular sale price. In bond investing, a discount is a bond price that is less than the par value of the bond. Such a bond is said to be trading at a discount to par value. For example, a bond with a par value of $1,000 that sells at $985 is selling at a discount of $15 to its par value. A bond with a coupon rate that is below the market interest rate for similar bonds trades at a discount.
Discount points
Discount points are also called points, mortgage points, and loan discount points. A point is equal to 1% of the loan amount. For example, 1 point on a loan of $150,000 is $1,500. Lenders consider mortgage points as interest that you pay in advance. As a result, the more points you pay when you close the loan, the lower your interest rate. If you qualify, you may be able to deduct mortgage points in the year you close the loan for tax purposes. Otherwise, you will have to amortize the points paid over the term of the loan.
Down payment
A down payment is the cash you deposit towards the purchase of a home. The larger the down payment, the less you need to borrow. For home loans, a down payment of 20% of the home purchase price is generally required to avoid paying private mortgage insurance.
Drawdowns
Draws, or drawdowns, are other names for withdrawals that you make on a line of credit. With a credit line, you only pay interest on the amount of your withdrawals, and only for the period that you have borrowed the money.
Earnest money
Funds given to a home's seller by the buyer, usually when the buyer makes an offer for the seller's home. Earnest money is 'good faith' money that indicates that the buyer is seriously interested in the home. If the sale is not completed, the earnest money is returned to the buyer.
Effective interest rate
The effective interest rate is your true interest-rate cost of borrowing, stated as an annual rate. It may be shown on an after-tax basis, adjusting for a mortgage interest deduction. The effective rate on a mortgage loan includes fees, points and other charges that you pay when you close the loan. The effective rate also includes compounded interest. Higher closing costs or more frequent compounding result in a higher effective interest rate.
Equity
The difference between the market value of a house and the amount still owed. As you continue to repay your home loan, your equity grows. Your equity will also increase if your house is re-appraised at a higher value. For example, if your house's purchase price was $180,000 and your have an outstanding mortgage of $110,000, your equity is $70,000. If the same house is re-appraised and gives a value of $200,000 - $20,000 more than the purchase price - your equity is $90,000.
Equity Loan
An installment loan or revolving line of credit that allows you to borrow money against the portion of your home that you already own (your equity). Generally the interest paid on equity loans is tax deductible.
Escrow
The process of using a third party - usually a closing officer - to handle the exchange of funds between buyer and seller in a real estate transaction. The escrow company is a fiduciary. Some states may use attorneys in lieu of escrow companies. Funds are deposited in an escrow account that neither the buyer nor seller can access. These funds may include the home's down payment and fees owed to insurers and real estate agents. The closing officer ensures that buyer and seller pay appropriate funds at loan closing.
Escrow account
Escrow funds are collected monthly with the monthly mortgage payment and deposited into the escrow account. The monthly escrow deposit consists of one-twelfth (1/12) the last annual tax, insurance, and mortgage insurance disbursements, if applicable. The current tax, insurance, and mortgage insurance bills are paid from the escrow account as they become due. Items that may be escrowed, include: city taxes, county taxes, township taxes, borough/village taxes, school taxes, ground rent, hazard insurance (homeowner's insurance), flood insurance, earthquake/windstorm insurance, private mortgage insurance (PMI), and/or FHA insurance.
Escrow Analysis
Escrow analysis is the review of the escrow account for each borrower. The Real Estate Settlement Procedures Act (RESPA) regulations require that an annual escrow review (disclosure statement) be provided to the borrower within 30 days of the end of the computation year. The computation year begins with the first payment and ends 12 months later. The review determines whether enough funds are being collected to pay future real estate tax and insurance bills. If the review determines that there are not enough funds, the borrower will have to remit additional funds to the escrow account. If the review determines that too much money was collected, the surplus funds are refunded back to the borrower. The monthly payment amount may also be adjusted at this time.
RESPA requires lenders to use the Aggregate method of analysis. The Aggregate method essentially takes all escrowed items and adds them together (including any possible shortages). The total is prorated over 12 months. A running balance is projected including amounts deposited into and disbursements made from the escrow account.
If an escrow surplus is determined, RESPA requires that any surplus greater than $50.00 must be refunded to the borrower. Should the account be delinquent, the borrower must bring the account current to receive the surplus. If an escrow shortage is determined, the borrower has the option of paying the shortage in full or having it prorated for twelve 12 months and included in the monthly mortgage payment. An escrow advance occurs when the escrow disbursements create a negative escrow balance. The lender provides the additional funds necessary to pay the escrow bills.
Fannie Mae® or Federal National Mortgage Corporation (FNMA)
A tax-paying corporation created by Congress that buys and sells conventional residential mortgages, as well as those insured by the FHA or guaranteed by the VA. This institution, which provides funds for one in seven mortgages, makes money for home loans more available and more affordable.
Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity is to insure residential mortgage loans made by private lenders.
Fees (mortgage points and miscellaneous fees)
Fees include mortgage points and expenses to underwrite and originate a mortgage loan. One point equals 1% of the loan amount. The IRS considers points to be a form of prepaid interest. Expenses include fees for appraisals, title searches, recording of documents, and conveyance taxes. Total closing costs include these fees, prepaid interest to the first mortgage payment, and prepayments for homeowner's insurance and property taxes.
FHA Loan
A loan insured by the Federal Housing Administration that is open to all qualified homebuyers. While there are limits to the size of FHA loans, the limits usually accommodate moderately priced homes almost anywhere in the country.
FICO
The Fair, Isaac Corporation, which developed the formula for credit scoring. The term also applies to the credit score itself. A FICO score can range from 300 to 850. In general, the higher the score, the more credit-worthy a borrower is in the eyes of the lender. A score of at least 680 indicates the borrower is very creditworthy
First mortgage lien
When a homeowner takes out a mortgage loan, he generally borrows from one lender. In exchange for the loan, that lender requires the homeowner to grant him a first mortgage lien. A first mortgage lien is the most senior legal claim. In the event the homeowner sells or defaults on the loan, the first mortgage lienholder is first in line to be repaid. If a homeowner takes out a home equity loan, he may borrow from a different lender. In exchange for the home equity loan, that lender requires the homeowner to grant a second mortgage lien. A second mortgage lien is junior, or subordinate, to the first mortgage lien. In other words, the lienholder of the second mortgage is second in line to be repaid.
Fixed interest-rate loan
A fixed interest-rate loan, or fixed rate loan, is a loan with a constant, unchanging interest rate over the loan term.
Freddie Mac or Federal Loan Mortgage Corporation (FHLMC)
Freddie Mac is a stockholder-owned corporation chartered by Congress to increase the supply of money that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers.
Future interest rates
The future interest rate is your prediction of the magnitude of change in the interest rate used to price your loan. Future rates are assumed to change at the same rate every year.
Future rate change
The periodic resetting of the interest rate on a loan to comply with the terms and conditions of the loan agreement. Most home equity lines of credit and other forms of revolving credit are made at an interest rate that is periodically reset to a market interest rate. One common rate is the prime rate, used by the biggest banks in the U.S. to price loans made to their best customers.
Good faith estimate
An estimate from a lender listing costs a borrower will incur in connection with closing the loan, including closing costs and your monthly payment (principal and interest).
Hazard insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire and windstorm.
Home equity
The current value of your home, minus the total amount of mortgage debt on the home. This amount represents the share of your home that you owe outright. If you owe no mortgage debt, the value of your home is entirely your equity. Often used as a source of borrowing for homeowners, home equity is not a static amount. It increases as you pay off your mortgage loan, and if your home value rises. It decreases if you borrow more against the value of your home, or your home's value declines. For example, if your home is appraised with a market value of $100,000, and you have mortgage debt of $60,000, your home equity is $40,000.
Home equity debt
IRS term for mortgage debt incurred for purposes other than buying, building or improving your home.
Home equity line of credit (HELOC)
A home equity line of credit is a form of revolving credit. This means you can borrow an amount up to but not exceeding a pre-approved credit limit. A home equity line of credit is secured by the residual equity in your home. To calculate equity, subtract mortgage debt from your home value. Home equity lines allow a homeowner to make repairs or other home improvements, refinance other debt, or use for general purposes. Unlike a home equity loan, payments are flexible and may consist of interest-only payments. (Some states prohibit or restrict equity-based loans and lines of credit. Please check with your First Horizon loan professional before you apply.)
Home equity loan
A home equity loan is a mortgage loan that is secured by the residual equity in your home. (To calculate equity, subtract mortgage debt from your home value.) Home equity loans allow a homeowner to make repairs or other home improvements, refinance other debt, or use for general purposes. Unlike a home equity line of credit, a home equity loan is an amortizing loan. (Some states prohibit or restrict equity-based loans and lines of credit. Please check with your First Horizon loan professional before you apply.)
Home equity lines of credit and loans
A home equity line of credit is a revolving credit loan, collateralized by a mortgage lien on the home, that allows the homeowner to use equity in the home to make repairs or other home improvements, refinance other debt or use for general purposes. A home equity loan is a loan, collateralized by a mortgage lien on the home, that allows the homeowner to use equity in the home to make repairs or other home improvements, refinance other debt or use for general purposes. Unlike a home equity line of credit, a home equity loan's term and payment amounts are fixed. (Some states prohibit or restrict equity-based loans and lines of credit. Please check with your First Horizon loan professional before you apply.)
Homeowner's insurance
Homeowner's Protection Act
Housing ratio
Lenders use housing ratios to approve loan applicants. Housing ratios equals a combined monthly mortgage payment divided by gross monthly income. For example, a combined monthly mortgage payment of $1,500 divided by gross monthly income of $4,500 equals a housing ratio of 33%.
HUD
The U.S. Department of Housing and Urban Development. This federal agency oversees the Federal Housing Administration and a variety of housing and community development programs.
HUD-1 Uniform Settlement Statement
A closing statement or settlement statement provided by the escrow company that outlines all costs associated with a loan transaction.
Impounds
Impounds are payments made in advance for homeowner's insurance premiums and real estate taxes. A homebuyer makes these payments to an escrow account at loan closing, and periodically replenishes the account. An escrow agent pays the local tax authority and insurer from this account. Analyzers calculate impounds for two months. Local lending requirements on funding the escrow account vary.
Index rate
An index rate is a widely-used interest rate that lenders use to set the interest rate on loans and credit cards. For residential mortgages, 10-year U.S. Treasury securities are often used for 30-year fixed-rate loans (on average, most homeowners live in their homes for a period of time closer to 10 years than 30 years). For ARM loans, a common index is the Eleventh District Cost of Funds Index (COFI), published by the San Francisco-based district office of the Federal Home Loan Bank. For credit cards, the U.S. commercial prime rate is frequently used as an index rate.
Indexing
A process of pricing loans that involves setting the interest rate to a base rate, usually a widely quoted market rate such as the yield on U.S. Treasury bills, LIBOR or the U.S. prime rate. Indexing allows a lender and borrower to share the risk of changes in the base rate. The base rate is reset periodically, often on a specific date every year or other interval. The amount added to the base rate is called the margin, or spread.
Initial interest rate
The starting interest rate on an adjustable rate mortgage loan (ARM), which is often below market ARM rates.
Initial offer
The initial price that a potential buyer offers for a home. Traders generally refer to a buyer's price as a bid and seller's price as an offer.
Interest rate
Interest rate is the cost of borrowing money calculated as a yearly percentage. For investors, interest rate is the rate earned on an investment as a yearly percentage. The simple interest rate is interest paid or received divided by loan or deposit. For example, $100 in annual interest on a $1,000 loan or deposit is a simple interest rate of 10%. Compounded interest rate is determined by the frequency of interest payments during the loan or deposit term. For example, a 10% loan or deposit that is compounded quarterly equals a compounded rate of 10.38%. If compounded daily, the compounded interest rate increases to 10.52%. (For CD investors, compounded interest rate is called annual percentage yield.) Effective interest rate, or annual percentage rate (APR), is the actual cost of borrowing. It includes fees and points you pay for a loan in the calculation. As a result, effective interest rate is higher than simple interest rate.
Interest rate adjustment
Interest rate adjustment is the amount of change, in basis points, that the base interest rate on adjustable rate mortgages (ARMs) changes. The interest rate is usually adjusted once a year, on the adjustment date, to reflect changes in the base rate. There are one hundred basis points in one percentage point. The interest rate on an ARM is the sum of a base, or index, rate and a spread to reflect the credit risk of the borrower.
Interest rate cap
A limit on the amount the interest rate for an adjustable rate mortgage can increase. A periodic cap limits how much the rate can increase at each adjustment period. A lifetime cap limits how much the rate can increase during the term of the loan.
Interest rate ceiling
An interest rate ceiling is the maximum interest rate that can be charged on an adjustable rate mortgage. Interest rate ceilings are also called interest rate caps.
Interest rate floor
An interest rate floor is the minimum interest rate than can be charged on an adjustable rate mortgage.
Interest rate lock
Also called a rate lock, an interest rate lock is a temporary guarantee that the interest rate quoted by a lender before your loan closes. It protects you from the chance of an increase in your borrowing interest rate. Lenders may charge you a small fee to give you an interest rate lock. Although rate locks are usually for 30 days, a lender may offer a longer period in exchange for a larger fee.
Interest-only payments
Mortgage payments that include only interest. No loan amortization occurs and, thus, the homeowner does not accrue any equity (unless the home's value increases).
Itemized deductions
Itemized deductions are qualified deductions used to reduce taxable income. The process of adding up qualified deductions is known as itemizing. Major types of qualified deductions that you can itemize include major medical expenses, home mortgage interest expenses, and state and local income taxes. The IRS recommends that you itemize deductions when the total itemized amount exceeds the standard deduction for your tax filing status. It also encourages you to itemize if you do not qualify for a standard deduction. You begin to lose some of your itemized deductions when your adjusted gross income reaches a certain amount. (Consult a tax professional.)
Itemizing (deductions)
Itemizing deductions is the process of adding up individual tax deductions to determine if this total exceeds your standard deduction. Itemizing is used when completing your federal income tax return.
Lien
A lien is a legal claim held by a creditor against an asset to guarantee repayment of the debt. Mortgage liens are regularly used in real estate lending as collateral for a loan.
Lifetime cap
A lifetime cap is the limit to how much the interest rate on an adjustable mortgage rate can be increased over the term of the loan.
Line of credit
A line of credit is a form of borrowing money called a revolving credit instrument. With a line of credit, the borrower can draw down only the amount needed, up to the amount of the credit limit. The borrower only pays interest on the amount drawn, or disbursed. Like a credit card (another form of revolving credit), you can continuously draw funds from the credit line up to the amount of the credit limit.
Loan application
A preliminary step in obtaining a loan. A loan application tells the lender how much the applicant wishes to borrow and how the loan proceeds will be used, lists personal income and assets, describes his or her work history, and authorizes the lender to order a credit report to assist in making a lending decision.
Loan balance/principal balance
This term describes a loan's outstanding balance, not including interest owed.
Loan closing
The final stage of the loan process that requires an exchange of any monies due and any signatures required to record a transaction. Closing costs are paid at the closing.
Loan origination fees
See definition for points. According to the IRS, the following terms are often used to describe points: discount points, loan discount points, maximum loan charges, and loan origination fees. Mortgage points are also a common synonym for points.
Loan pay-down
A loan pay-down is a payment that you make on a loan or other debt to reduce the amount owed. A loan payoff, in comparison, is a payment that you make on a loan or other debt to settle the entire amount owed.
Loan payoff
A loan payoff is a payment that you make on a loan or other debt to remove the entire amount owed. A loan pay-down, in comparison, is a payment that you make on a loan or other debt to settle the amount owed.
Loan points
Mortgage interest that you pay when you close a loan. One mortgage point equals one percent of the loan amount (e.g., $1,000 on a mortgage loan of $100,000). Mortgage points are also called discount points. Essentially, you are paying interest in advance in exchange for a lower mortgage rate. Since the IRS considers mortgage points as legitimate mortgage interest, you can deduct this expense from your taxable income. (Consult a tax professional.)
Loan term
Loan term is the length, or period, of a loan. Mortgage loan terms are generally 15 or 30 years.
Loan qualification estimates: aggressive versus conservative
Lenders ease their loan underwriting guidelines when economic times are good. This environment leads to more competition among lenders for qualified borrowers. Thus, lenders become more aggressive in making loans. When economic times are worse, lenders rein the amounts they are willing to lend and become more conservative.
Loan-to-value ratio (LTV)
Your loan-to-value ratio is a key factor in determining how much of a home you can qualify for. To calculate, divide the mortgage loan amount by the fair market of the home value. A recent appraisal is generally required to determine fair market value. If you have existing mortgage debt or are adding debt, divide the combined mortgage balance by the home value. For example, a mortgage loan of $150,000 on a home that is appraised at $200,000 has an LTV of 75%. As a general rule, mortgage loans that exceed an LTV of 80% require private mortgage insurance.
Margin
Margin is the additional points added to the index of an adjustable rate mortgage (ARM) or other variable rate loans to set the loan rate. For example, if a 1-year ARM loan has a margin of 300 basis points over the yield on 1-year Treasury bills and the T-bill yield is 6.5%, the loan rate is set to 9.5%. The margin is usually based on the market and is typically between two and three percentage points. After the margin is added to the index, the amount is usually rounded (up/down/nearest) to a specified percentage.
Monthly payment
Monthly payment is the dollar amount of your loan repayments you pay each month. If you do not pay a penalty for extra payments (called a prepayment penalty), your monthly payment may be larger than your required payment if you prefer to pay off your loan early.
Mortgage balance
Your mortgage balance is the unpaid principal on your mortgage loan. In the early years of an amortizing mortgage loan, most of your loan payment is applied to interest. This means that your balance drops more slowly than in later years, when a larger share of payments is applied to your balance. In calculating home equity, subtract your combined mortgage balance from your home's fair market value. (A new appraisal will likely be needed if older than six months to a year.) For example, if your home's fair market value is $200,000 and your mortgage balance is $125,000, you have $75,000 in home equity. If you have two mortgage loans and their combined balances are $150,000, your home equity is $50,000.
Mortgage interest tax deduction
The IRS allows you to deduct mortgage interest from your taxable income. The maximum amount of the credit is $2,000. This mortgage interest tax deduction reduces your tax bill. For example, if you are in the 27% income tax bracket and pay $10,000 in interest this year, you will save $2,700 in federal income taxes. (Consult a tax professional.)
Mortgage loan
A loan used to pay for your home. In exchange for a loan to buy your home, you give the mortgage lender the legal right to use your home as collateral. A first mortgage lien is the legal right you give the lender to buy your home. If you later need to borrow more money, and are willing to use the equity in your home as collateral, a lender will often make you a second mortgage loan (at a higher rate than your first mortgage) in exchange for a lien on your home that is subordinate to the first mortgage lien. If you itemize your tax deductions, the interest you pay on your income taxes can be deducted from your income, lowering your taxes.
Mortgage points
Mortage points are also called discount points, points, loan discount points, loan origination fees or maximum loan charges. A point is equal to 1% of the loan amount. For example, 1 point on a loan of $150,000 equals $1,500. Lenders consider mortgage points as interest that you pay in advance. As a result, the more points you pay when you close the loan, the lower your interest rate. If you qualify, you may be able to deduct mortgage points in the year you close the loan for tax purposes. Otherwise, you will have to amortize the points paid over the term of the loan.
Original Value
The lesser of the two prices reflected in a home's appraisal and sales contract, at the time the loan is closed. For example, if a home's value is $140,000 in a sales contract, but is appraised at $130,000, the home's original value at the time of closing is $130,000.
Origination fee
A lender may charge an origination fee in addition to any mortgage points you pay. Origination fees are the lender's charge for funding your mortgage with a mortgage broker. The process of funding your loan is called origination.
P+I
P+I is an acronym for principal and interest that you pay on an amortizing loan, including mortgage loans. If your mortgage loan payments include property taxes and homeowners' insurance, the monthly payment amount is referred to as PITI.
PITI
PITI is an acronym for loan principal, interest, property taxes and homeowner's insurance.
Payment cap
A limit on the amount that a monthly loan payment can increase. A periodic cap limits the amount of the increase at each adjustment period. A lifetime cap limits the amount that the monthly payment can increase during the term of the loan. A potential peril of payment caps is negative amortization. In the case of an adjustable rate mortgage with a payment cap, rising interest rates may cause the loan payment to be insufficient to cover even the interest portion of the scheduled payment. In this case, the unpaid interest may be added to the mortgage loan principal, if the loan agreement permits.
Payoff amount
The payoff amount, included on the payoff statement, is the principal balance owed plus interest due, along with any late fees or charges on the account through the date of the payoff.
Periodic interest rate change
A process of resetting the borrower's interest rate on an adjustable rate mortgage at a set interval (usually yearly). A margin, or spread, is added to a base rate to calculate the new interest rate. Widely used base rates for lending in the U.S. include the yield on T-bills, prime rate or LIBOR. The base rate for home equity lines of credit is often the prime rate, which is the rate the largest U.S. banks charge their best customers. For example, if a credit line's rate is the prime rate plus 2 percentage points and prime rate is presently 6%, the credit line's rate is reset to 8%.
Periodic rate cap
The periodic interest rate cap is the maximum amount the loan rate can change on an adjustable rate mortgage loan on the anniversary date. ARM loan rates are often reset once a year after an initial period. A lifetime cap often exists. A lifetime cap limits the maximum loan rate that can be charged.
Points
Points are also called discount points, mortgage points, loan discount points, loan origination fees, and maximum loan charges. A point is equal to 1% of the loan amount. For example, 1 point on a loan of $150,000 is $1,500. Lenders consider mortgage points as interest that you pay in advance. As a result, the more points you pay when you close the loan, the lower your interest rate. If you qualify, you may be able to deduct mortgage points in the year you close the loan for tax purposes. Otherwise, you will have to amortize the points paid over the term of the loan.
Pre-qualification
This is the first step in applying for a mortgage loan. First, a lender or broker pre-qualifies you. Pre-qualification determines whether you have the financial resources to match the size of loan you are requesting. Information is often not verified at this step. It is a preliminary step to screen your viability as a loan applicant and also indicates approximately how much you spend on a home. Pre-approval is the next step. It requires much more detail. You will need to verify your income and down payment, for instance. A lender will determine whether you meet its underwriting guidelines. A pre-approval signifies that a lender will offer you a loan.
Predicted future interest rate
The predicted future interest rate is your prediction of the magnitude of change in the interest rate used to price your loan. Future rates are assumed to change at the same rate every year.
Prepaid interest
Prepaid interest is the interest that you pay the lender in advance, often when you close on a loan. If you close a loan before the end of the month, the lender will require you to pay interest for the number of days until the end of the month. This is one form of prepaid interest. Analyzers that calculate prepaid interest assume the loan closing date is the midpoint of a 30-day month. As a result, prepaid interest is calculated for 15 days. The IRS recognizes points that you pay at loan closing as prepaid interest. One point equals 1% of the loan amount. If you meet a checklist of requirements, the IRS allows you to deduct these points in the first year of your mortgage loan. (Check with a tax professional.)
Prepayment
A prepayment is an amount that you pay on your mortgage or other loan that constitutes an additional, unscheduled payment. Prepayments pay off a loan sooner and reduce total interest expense.
Prepayment penalty
A prepayment penalty is a fee that a lender may charge if you make unscheduled, extra payments on your loan.
Prime rate
The prime rate is the interest rate that commercial banks in the U.S. charge their best customers. The prime rate is regularly used as a base rate, or index, to price a home equity credit line. For example, if a credit line is offered at 2 percentage points over prime, and prime is currently 7%, the credit line would have an interest rate of 9%.
Principal
Principal is the original amount of your loan. Principal is also called the loan balance.
Principal balance/loan balance
This term describes a loan's outstanding balance, not including interest owed.
Private mortgage insurance (PMI)
Private mortgage insurance (PMI) protects lenders and other parties against the risk of mortgage loan default. Generally, lenders require borrowers to purchase PMI coverage when the outstanding balance of the loan is greater than 80% of the value of the property securing the loan.
Property insurance
Also called homeowner's insurance, property insurance protects the homeowner from weather-related damage, as well as potential liability from events that occur on the property. Lenders require homeowner's insurance coverage to protect the collateral that secures their loan. Some homeowner's insurance policies do not cover catastrophic events such as tornadoes, hurricanes or floods. These kinds of events generally require a separate insurance policy.
Property tax
Property taxes are also called real estate taxes. These taxes are paid to the local taxing authority or municipality. The amount you pay can generally be deducted from your federal income taxes. Property taxes are often levied as a percentage of your home's assessed value. For example, if you pay 0.5% in property taxes of the assessed value, a home assessed at $250,000 would have a yearly property tax bill of $1,250.
Property taxes and homeowner's insurance
Property Value
An estimate of the value of your real property. The property's appraisal or fair market value is most commonly used to estimate value. A certified appraiser determines an appraisal value.
Rate lock
Also called interest rate lock, a rate lock is a temporary guarantee that the interest rate that a lender quotes you will not change. It protects you from the chance of an increase in your borrowing interest rate before your loan closes. Lenders may charge you a small fee to give you an interest rate lock. Although rate locks are usually for 30 days, a lender may be willing to offer a longer period in exchange for a larger fee.
Real Estate Settlement Procedures Act (RESPA)
Real Estate Settlement Procedures Act (RESPA) is a federal consumer protection law. It aims to prevent abuses in the loan closing, or settlement, procedures for residential mortgage loan transactions. RESPA requires the lender to provide a series of disclosures that begins when the borrower applies for a loan. RESPA also requires the lender to notify the borrower if it transfers the loan servicing rights to another company. It also requires the lender to send a yearly statement to the borrower that summarizes escrow deposits and payments over the past year.
Recording fee
Fee you pay for recording a transaction and a transfer of title at a records office. This kind of fee is usually included in the closing costs when you buy a home.
Refinancing
Refinancing is a means of replacing current home loan with one that has a lower interest rate. But it can also be done in order to switch from a fixed to variable rate, or vice versa, or to eliminate a balloon payment. A cash-out refinancing is one that involves you paying off your loan and borrowing an additional amount. The entire loan amount is secured by a mortgage lien on your home.
Regulation B
Regulation B prohibits discrimination in any aspect of a credit transaction on the basis of national origin, marital status, religion, gender, color, age, race, receipt of public assistance funds and exercise of any right under the Consumer Credit Protection Act.
Regulation C
Regulation C requires mortgage lenders in metropolitan areas to disclose to the public data about home purchase and home improvement loans (including refinancings) that lenders originate or purchase and about the disposition of applications for such loans. Lenders collect and report data about each application or loan, each applicant or borrower (including national origin or race, gender, and annual income), and each property (including occupancy status and location).
Regulation Z
Regulation Z promotes the informed use of consumer credit by requiring disclosures about its terms and cost. The regulation also gives consumers the right to cancel certain credit transactions that involve a lien on the principal dwelling of a consumer, regulates certain credit card practices and provides a means for fair and timely resolution of credit billing disputes.
Reverse mortgage
A lump sum payment or annuity that is paid from a lender or insurance company to the homeowner to supplement or provide income. The homeowner or estate repays the mortgage obligation when he or she sells or vacates the home, or dies. Reverse mortgages allow older homeowner to borrow from the equity in their homes. Reverse mortgages are not considered taxable income, and do not affect Social Security or Medicare benefits. No mortgage interest tax deduction is available.
Revolving credit
Revolving credit is a type of open-end credit. Open-end credit allows the borrower to borrow funds from the loan as long as it does not exceed the credit limit of the borrower. In some cases, lenders require minimum payments or impose a clean-up period. These steps ensure that the borrower continues to have the means of repaying the debt.
Sales contract
Legally binding document between buyer and seller of a home that should address all terms and conditions of the transaction.
Second mortgage lien
When a homeowner takes out a mortgage loan, he generally borrows from one lender. In exchange for the loan, that lender requires the homeowner to grant him a first mortgage lien. A first mortgage lien is the most senior legal claim. In the event the homeowner sells or defaults on the loan, the first mortgage lienholder is first in line to be repaid. If a homeowner takes out a home equity loan, he or she may borrow from a different lender. In exchange for the home equity loan, that lender requires the homeowner to grant a second mortgage lien. A second mortgage lien is junior, or subordinate, to the first mortgage lien. In other words, the lienholder of the second mortgage is second in line to be repaid in case of default.
Selling costs
Selling costs are comprised of the commission and ancillary fees that you pay when you sell your home. Commission is paid to the broker or agent that sells your home. It is usually stated as a percentage of the sale price of your home. Commissions are often in the range of 3 to 6% of the sale price. Homes that are being sold by sellers who seek to sell directly in order to avoid paying a commission are called for-sale-by-owner (FSBO) homes.
Soldiers and Sailors Act
The Soldiers' and Sailors' Civil Relief Act of 1940, was passed by Congress to provide protection for individuals called to active duty in the military service. It is intended to postpone or suspend certain civil obligations to enable service members to devote their full attention to military duty. The Act applies to the United States, the states, the District of Columbia, all U.S. territories and in all courts therein. The Soldiers and Sailors Act applies to all branches of the Military. (Army, Navy, Marines, Air Force, National Guard, Coast Guard, Reserve personnel, officers of the Public Health Service, National Oceanic and Atmospheric Administration). The Act applies to all service members who are called to active duty. The protection begins on the date of entering active duty and generally terminates within 30 to 90 days after the date of discharge from active duty.
The Soldiers and Sailors Act enables military persons who qualify to pay a lower interest rate during the period of time for which they are called to active duty. If prior to entering service, a member incurs a loan or obligation with an interest rate in excess of 6%, the member will, upon application/approval from the lender, not be obligated to pay interest in excess of 6%.
If you were called to Active Military Duty, please fax or mail a copy of the Military Orders along with a written request to our Investor Reporting department. The written request needs to state that the borrower is a member of the Armed Forces and has been called to active duty. The written request may be submitted by someone with authority to make the request on the borrower's behalf, (spouse, or Attorney). The written request must include the signature of the borrower or someone with authority on behalf of the borrower.
Upon receipt of the Military orders and written request, Investor Reporting will review the account to determine if all qualifications are met.
Investor Reporting Mailing Address:
First Horizon Home Loans
4000 Horizon Way
Irving, TX 75063
Attn: Investor Reporting - Mail Stop 6103
Investor Reporting Telephone number - 1-800-364-7662 Ext. 14288
Investor Reporting Fax Number - 214-441-4270
Spread
Spread is the difference between two interest rates, usually stated in basis points. One percentage point consists of 100 basis points. For example, a spread on a card that charges 14% and one that charges 12.5% is 150 basis points.
Tax savings
Tax savings are the amount you may save in taxes from a tax deduction or credit that you would otherwise pay if you did not have the deduction or credit. Tax savings are also called a tax shield. To calculate tax savings from a deduction, multiply the amount of the deduction by your marginal income tax rate. At an income tax rate of 27%, a $2,000 qualified contribution to a company retirement plan may save you $560 in taxes. And if you paid $10,000 in home mortgage interest, you may save up to $2,700 in income taxes if you are in the same tax bracket. Your deductions for interest expense on mortgage and home equity debt may be limited. You may wish to consult a financial or tax adviser. For businesses, tax savings are realized on such deductible expenses as lease payments, interest on loan payments, and depreciation expenses. (Consult a tax professional.)
Tax shield
Tax shield is the amount of taxes you may save from a tax deduction or tax credit that you would otherwise pay without the deduction or credit. To calculate tax savings from a deduction, multiply the amount of the deduction by your marginal income tax rate. At a marginal income tax rate of 27%, a $2,000 qualified contribution to a company retirement plan may save you $560 in taxes. And if you paid $10,000 in home mortgage interest, you may save up to $2,700 in income taxes if you are in the same tax bracket. Your deductions for interest expense on mortgage and home equity debt may be limited. You may wish to consult a financial or tax adviser. For businesses, tax savings are realized on such deductible expenses as lease payments, interest on loan payments, and depreciation expenses. (Consult a tax professional.)
Term
The period of a loan, generally measured in years. Mortgage loans are usually 15 or 30 years, although 10- and 20-year terms are also available.
Title
A legal document that shows who owns an asset. A title includes any liens or other encumbrances, which are claims on the asset by lenders.
Title insurance
Title insurance covers the expenses necessary to perform a records search of your property's ownership history, and may protect you from claims that my be made against your ownership of the property, such as heirs or creditors of former owners. The extent of your coverage depends upon whether you have an owner's standard coverage or extended-coverage title insurance policy. To obtain a mortgage, you will probably be required to buy a lender's title insurance policy to protect your lender.
Title search
A review for any liens or other encumbrances that may be recorded on a parcel of real estate. A title search is a step in the process of due diligence that a lender does as part of making a mortgage loan.
Total payment
Total monthly payment for a residential mortgage loan is the sum of mortgage principal, interest, property taxes and homeowner's insurance (PITI). Other applicable amounts may be included, including premiums for other property insurance and homeowner's or condominium association fees.
Treasury bills (T-bills)
U.S. Treasury bills are short-term debt obligations of the U.S. Treasury and are often used as indexes for adjustable rate mortgages. T-bills are usually issued to mature in three or six months. Prices for T-bills are stated as a discount to the par value. For example, a T-bill with a price of 99.65 is selling for 99.65% of its par value. T-bills are auctioned weekly and used to pay operations of the federal government. T-bills are considered to be among the safest and most liquid investments.
Truth in Lending Act (TILA)/Truth in Lending Statement
The Truth in Lending Act (TILA) is a consumer protection law that requires lenders to disclose (the Truth in Lending Statement) all of your loan costs, your true interest cost as an annual percentage rate, and total number of payments you will make over the loan term.
Underwriting
Underwriting is the process of evaluating a loan prospect to ensure they have the financial capacity to repay the loan. An underwriter evaluates a loan application using FICO scores, debt ratios, and the potential borrower's employment history as major decisioning factors.
Upfront costs
Upfront costs are fees and any other costs that you pay at a loan closing. This includes mortgage loans, home equity and refinancing loans. Upfront costs are also called closing costs. Upfront costs include the amount needed for a down payment, any prepaid interest, loan underwriting fees, and fees that you pay for ancillary services. These include fees for a title search, appraisal and credit report.
Value of property owned
An estimate of the value of your real property. The property's appraisal or fair market value is most commonly used to estimate value. A certified appraiser determines the appraisal value. Market value is the price that buyers have been willing to pay for recent purchases of comparable assets. It is good practice to use the lower value if two or more estimates are available.
Variable interest rate loan
A variable interest rate loan is a loan whose interest rate adjusts periodically over the loan term. The loan interest rate is usually calculated by adding a margin, or spread, to a base rate. The base, or index rate, is a variable interest rate.
