Western Foothill Mortgage's Loan Zone: Definitions of Mortgage Terms

ARM - Adjustable Rate Mortgage
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).

APR - Annual Percentage Rate
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.

Assumability or Assumable Mortgage
When a home is sold, the seller may be able to transfer the mortgage to the new buyer. Lenders generally require a credit review of the new borrower and may charge a fee for the assumption. Assumability can help you attract buyers if you sell your home, however, you may still be liable to the lender for the loan should the new borrower default on the loan.

Buydown
With a buydown, the seller pays an amount to the lender so that the lender can give you a lower rate and lower payment. The seller may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages.

Cap or Caps
A term used with ARM loans. A cap is the 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 do not limit the amount of interest the lender is earning, so they may cause negative amortization. Usually expressed as 2/6 Caps, this would be an ARM loan with a maximum payment adjustment of 2% per adjustment and a maximum life time change of 6%.

Convertible or 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 Point(s)
Often called "points" the Discount Points are a one-time charge used to adjust the yield on the loan to what market conditions demand or to lower (buy-down) the interest rate. Negative discount(-0.250), which appears on the rate sheet from time to time, is a credit to help pay the borrower's closing costs, down payment, etc. depending on the terms of the loan program being used. Each "point" is equal to 1% of the mortgage loan amount. For example, if you get a mortgage loan for $100,000, one point is equal to 1% of $100,000 or $1000.

Fixed Rate Mortgage
A mortgage where the monthly principal and interest payments are fixed for the term of the loan; i.e., 15 or 30 years fixed.

Index
A term used with ARM loans. The index is the measure of interest rate changes that the lender uses to decide how much the interest rate on the ARM will change over time. No one can be sure when an index rate will go up or down. Some common indexes used are: 1 year Treasury rate, COFI (Cost of Index Funds) & 6 month LIBOR (London Interbank Offered Rate).

Interest Rate
This is the monthly principal and interest payment rate. Taxes and insurance need to be included to arrive at the total monthly payment. Not to be confused with the annual percentage rate (A.P.R.).

LTV - Loan To Value
The ratio expressed as a percentage of the loan amount to the sales price or appraised value, whichever is less. A $100,000 sales price with 20% down means the LTV is 80%.

Margin
A term used with ARM loans. The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

NegAm - Negative Amortization
Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. NegAm 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. NegAm can occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest due.

NOO - Non-Owner Occupied
Subject property will not be occupied by the borrower. Investment property.

O/O - Owner Occupied
Subject property must be occupied by the borrower.

Origination Fee
This fee covers the administrative costs of processing the loan. Often expressed as a percentage of the loan. Each "point" is equal to 1% of the mortgage loan amount. For example, if you get a mortgage loan for $100,000, one point is equal to 1% of $100,000 or $1000. Generally the buyer pays this fee unless other arrangements have been made with the seller and written into the sales contract. Discount Points can also be used to pay this fee.

PMI or MI - Private Mortgage Insurance
The insurance obtained on a conventional loan to protect the lender in the event of default by a borrower. Normally used when the down payment is less than 20% or less than 25 to 30% for NOO properties.

Qualifying Ratios
The ratios of gross monthly income to total house payment (top or front ratio) and the gross monthly income to the total house payment plus other debts (bottom or back ratio). Purchasers must qualify using both ratios. Also known as income ratios, or debt ratios. These ratios are guidelines and compensating factors may allow for some flexibility.