Annual Percentage Rate (APR)
A measure of the cost of credit, expressed as a yearly rate. It
includes interest as well as other charges. Because all lenders follow
the same rules to ensure the accuracy of the annual percentage rate, it
provides consumers with a good basis for comparing the cost of loans,
including mortgage plans.
Adjustable-Rate Mortgage (ARM)
A mortgage where the interest rate is not fixed, but changes during
the life of the loan in line with movements in an index rate. You may
also see ARMs referred to as AMLs (adjustable mortgage loans) or VRMs
(variable-rate mortgages).
Assumability
When a home is sold, the seller may be able to transfer the
mortgage to the new buyer. This means the mortgage is assumable. Lenders
generally require a credit review of the new borrower and may charge a
fee for the assumption. Some mortgages contain a due-on-sale clause,
which means that the mortgage may not be transferable to a new buyer.
Instead, the lender may make you pay the entire balance that is due when
you sell the home. Assumability can help you attract buyers if you sell
your home.
Buydown
With a buydown, the seller pays an amount to the lender so that the
lender can give you a lower rate and lower payments, usually for an
early period in an ARM. The seller may increase the sales price to cover
the cost of the buydown. Buydowns can occur in all types of mortgages,
not just ARMs.
Cap
A limit on how much the interest rate or the monthly payment can
change, either at each adjustment or during the life of the mortgage.
Payment caps don't limit the amount of interest the lender is earning,
so they may cause negative amortization.
Conversion Clause
A provision in some ARMs that allows you to change the ARM to a
fixed-rate loan at some point during the term. Usually conversion is
allowed at the end of the first adjustment period. At the time of the
conversion, the new fixed rate is generally set at one of the rates then
prevailing for fixed rate mortgages. The conversion feature may be
available at extra cost.
Discount
In an ARM with an initial rate discount, the lender gives up a
number of percentage points in interest to give you a lower rate and
lower payments for part of the mortgage term (usually for one year or
less). After the discount period, the ARM rate will probably go up
depending on the index rate.
Index
The index is the measure of interest rate changes that the lender
uses to decide how much the interest rate on an ARM will change over
time. No one can be sure when an index rate will go up or down. To help
you get an idea of how to compare different indexes, the following chart
shows a few common indexes over a ten-year period (1977-87). As you can
see, some index rates tend to be higher than others, and some more
volatile. (But if a lender bases interest rate adjustments on the
average value of an index over time, your interest rate would not be as
volatile.) You should ask your lender how the index for any ARM you are
considering has changed in recent years, and where it is reported.
Margin
The number of percentage points the lender adds to the index rate
to calculate the ARM interest rate at each adjustment.
Negative Amortization
Amortization means that monthly payments are large enough to pay
the interest and reduce the principal on your mortgage. Negative
amortization occurs when the monthly payments do not cover all of the
interest cost. The interest cost that isn't covered is added to the
unpaid principal balance. This means that even after making many
payments, you could owe more than you did at the beginning of the loan.
Negative amortization can occur when an ARM has a payment cap that
results in monthly payments not high enough to cover the interest due.
Points
A point is equal to one percent of the principal amount of your
mortgage. For example, if you get a mortgage for $65,000, one point
means you pay $650 to the lender. Lenders frequently charge points in
both fixed-rate and adjustable-rate mortgages in order to increase the
yield on the mortgage and to cover loan closing costs. These points
usually are collected at closing and may be paid by the borrower or the
home seller, or may be split between them.