A-B Terms

Adjustable Rate Mortgage (ARM): A mortgage loan with payments usually lower than a fixed rate initially, but is subject to changes in interest rates. There are a variety of ARMs that can have an initial interest rate that lasts three to 10 years, adjusting annually thereafter. They are described as 3/1, 5/1, 7/1 and 10/1. A 3/1 ARM starts out with a low rate that lasts three years, then is adjusted annually. A 5/1 ARM has an introductory rate that lasts five years, and 7/1 and 10/1 ARMs have intro rates that last seven and 10 years. The monthly payment amount is usually subject to a cap.

Amortization: Repayment of a mortgage loan through regular monthly installments of principal and interest. At the end of the scheduled payments (e.g., monthly payments for 15 or 30 years), you will own your home.

Annual Percentage Rate (APR): Calculated by using a standard formula, the APR is expressed as a yearly rate (e.g., 8.107% APR) and includes the interest, points (discount and origination), mortgage insurance, and other fees. The APR on a mortgage will usually be higher than the stated interest rate because the APR includes fees and the interest rate doesn’t.

Assets: Assets are anything of financial value that can be converted into cash (i.e., stocks and bonds, automobiles, real estate, retirement funds, and savings).

Assumable mortgage: A mortgage that can be transferred from a seller to a buyer. The buyer then takes over payment of an existing loan.

Automated Underwriting System: A computerized system used to assess information provided by a borrower, plus public information about the borrower, to quickly determine whether a loan should be pre-approved.

Balloon mortgage: A mortgage that typically offers low rates for the first 3 to 10 years, at which point the principal balance needs to be paid in full. Borrowers usually sell before the balance is due or refinance the loan.

Bankruptcy: Bankruptcy is the legal process in which a person declares their inability to pay off their debts. Bankruptcy does not mean you cannot get a loan, but the terms of your loan may not be as favorable.

Borrower: A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.

Bridge loan: A loan that “bridges” the gap between the purchase of a new home and the sale of the borrower’s current home. Usually up to 6 months long.