GLOSSARY

GLOSSARY


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.