Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that can change based on changes in a particular index. There are many different types of ARM's. There are 1 year ARM's, 2 year, 3 year, 5 year, 7 year and 10 year.
Adjusted Balance
This is an interest calculation used by some credit card issuers when they subtract all payments made during the month, and then add the calculated finance charges.
Adjusted Gross Income (AGI)
This is the amount of your income that is taxable. AGI includes your gross income from taxable sources minus certain items, such as payments to a 401K or a deductible for health care insurance. AGI minus deductions and personal exemptions equals your taxable income.
Amortization
The gradual reduction of debt by periodic payments (for a specified period of time), that are large enough to cover interest and principal.
Annual Percentage Rate (APR)
The annual cost of a loan or credit, including interest and fees. APR was created to assist borrowers in comparing the cost of a loan or credit with different lenders.
Average Daily Balance
The average daily balance is determined by adding each day's balance and dividing that total by the number of days in the billing cycle. The average daily balance is then multiplied by a credit card's specified periodic rate to compute the interest due.
Bankruptcy
A court proceeding in which a debtor is relieved of debt liability, in whole or in part, depending on the type of bankruptcy filed. There are two primary filings: a Chapter 7 bankruptcy declaration allows for the liquidation of assets and the discharge of most debts; a Chapter 13 bankruptcy allows a borrower with a steady income to pay off bills over a 36- to 60-month period.
Charge-Off
When your creditor elects to transfer a delinquent account to a category called "bad debt" or "loss" and delivers the account to a collection agency.
COFI
This is an acronym for the Federal Cost of Funds Index. This index can be associated with your mortgage rate. This index is calculated as the sum of the monthly average interest rates for marketable Treasury bills and for marketable Treasury notes, divided by two, and rounded to three decimal places. It is used as a benchmark for some types of mortgage loans and securities.
Collection Agency
This is a company hired by a creditor to collect a debt that is owed. Creditors typically hire a collection agency only after they have made efforts to collect the debt themselves, usually through letters and telephone calls. Collection agencies are regulated by the federal Fair Debt Collection Practices Act.
Compound Interest
Payment of interest, not only on principal investment, but also on the interest accumulated in previous periods.
Conforming Loan
A conventional mortgage that conforms to the loan amounts and mortgage guidelines used by the Federal National Mortgage Association (FNMA or "Fannie Mae), and/or the guidelines of The Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac).
Conventional Mortgage
A regular loan that may be privately insured, but is not insured or guaranteed by the government.
Credit Repositories (Credit Agencies)
A company that collects and sells information about how consumers handle credit. The three major credit bureaus are Equifax, Experian, and TransUnion.
Credit History
Credit can be broken into three primary categories:
- Mortgage Credit -- Your payment history on your existing, or previous mortgage. The past repayment history on mortgage debt can be a good indication of a borrowers attitude toward mortgage obligations. Payment history on mortgage debt is very important in determining your credit grade.
- Consumer Credit -- This category relates to installment and revolving credit. Installment credit encompasses longer term credit with structured payment plans, such as car loans or student loans. Revolving credit encompasses department store and bank credit cards. Generally, payments received 30 days past the due date are reflected in the credit report as late.
- Public Records -- The third category relates to public records such as previous bankruptcies, collections, foreclosures and judgments.
Daily Periodic Rate
The interest rate factor used to calculate interest charges on a daily basis. The factor equals the annual percentage rate divided by 365.
Debt-to-Income Ratio (Debt Ratio)
Besides credit considerations, lenders review the capacity of the borrowers to repay the mortgage obligation. Lenders calculate the debt ratio dividing the total monthly debts (the housing expenses for the proposed loan plus the borrower other monthly credit obligations) by the total monthly income. For example, if the total obligations of the borrower is $1,400 ($1,000 for housing expenses and $400 for other credit obligations), the debt ratio would be 35% ($1,400/$4,000 = 35%).
Default
An account on which the payments have not been made according to the terms.
FHA Mortgage
A mortgage on which the lender is insured against loss by theFederal Housing Administration, with the borrower paying the mortgage insurance premium.
FICO
Mortgage lenders and other creditors frequently use credit scores, known as FICO scores, to determine the credit risk. The higher the credit score, the better the credit risk.
FICO stands for Fair Isaac Company, the company that created the original scoring system. Each credit bureau has its own unique system that allows them to offer a score based solely on the contents of the credit bureau's data about an individual. However, a numerical score at one bureau is the equivalent of the same numerical score at another. Thus, a score of 700 from Experian indicates the same creditworthiness as a score of 700 from Trans Union or Equifax, even though the calculations used to determine those scores are different at each bureau. The scores range from 300 to 850 points, and in general, a score of 700 or above indicates a good credit history. Average FICO scores fall into the range of 660 to 690..
It must however be noted that not all lenders give same value to a particular credit score. Besides, not all lenders use credit scoring system and even when they do they may not use credit scoring system for all their loan programs.
Forbearance
Voluntarily refraining from doing something, such as asserting a legal right. For example, a creditor may forbear on its right to collect a debt by temporarily postponing or reducing the borrower's payments.
Foreclosure
The legal process where the mortgage lender sells real property in the event of a default. Proceeds are applied to the mortgage debt, and the owner's right of ownership is terminated.
Good Faith Estimate
An estimate of the fees associated with closing a loan that is given to you within three business days of submitting a loan application in personal, via telephone or internet.
Home Equity Line of Credit (HELOC)
A type of mortgage loan that allows homeowners to access funds from the equity of their home. Repayment is secured through a second mortgage against the home. The borrower only pays on the amount borrowed. For example, John gets a $50,000 HELOC to complete some home improvements. If he only uses $15,000 of the loan, he only pays on the $15,000. He can still access the line of credit up to $50,000. He only makes payments on the amount he uses. This is often used for home improvements and other large purchases and at times debt consolidation. A HELOC is a variable rate mortgage.
Home Equity Loan
Unlike a HELOC, this is a fully funded loan. Using the same example above, John would have to make a payment on the $50,000 loan even if he only used $15,000. The rate on a Home Equity loan is usually lower than a HELOC.
Household Income
This is total income of all members of a household. An important measure used by creditors evaluating applications for joint credit.
HUD-1 Statement (Settlement Sheet)
An itemized listing of the costs of a real estate transaction, including commissions, loan fees, points, and escrow amounts. The amount of costs paid by the buyer and the seller are listed, and the seller's net proceeds are disclosed. The borrower retains the right to obtain a HUD-1 for review 24 hours prior to signing loan closing documentation.
Indexed Rate
The sum of the published index, plus the margin, in an adjustable rate mortgage.
Installment Loan / Installment Credit
An account in which the debt is divided into amounts to be paid at specific intervals set by the terms of the loan.
Joint Credit
This is an account owned by two or more people where all parties are responsible for repaying the debt.
Judgment
A court verdict that requires a person to do something, such as pay a debt.
LIBOR
This is an acronym for London Inter Bank Offered Rate. This is an index in which a mortgage or credit card rate can be associated with. This is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euromarket in terms of volume.
The LIBOR is an international index which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds.
Lien
A secured claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan-to-Value Ratio (LTV)
A ratio expressed as a percentage, determined by dividing the loan amount by the sales price or appraised value, expressed as a percentage. For example, if a house is worth $100,000 and you needed a loan of $75,000, your LTV if 75% (75,000/100,000 = 75%).
Minimum Payment
The minimum amount, usually 2-3 percent of the outstanding balance, a cardholder can pay to keep a credit card account from going into default.
Mortgage
A loan secured by real estate, where the borrower allows the lender a lien on the property as security until the loan is repaid
Periodic Rate
The interest rate described in relation to a specific amount of time. For example, the monthly periodic rate, is the cost of credit per month. The daily periodic rate is the cost of credit per day.
Personal Loan
A loan secured by property other than real estate, or unsecured.
PITI
This is shorthand for principal, interest, taxes, and insurance, which are all of the elements of a monthly mortgage payment.
Prepayment Penalty
A charge imposed by the lender if a borrower pays off a loan early. The penalty typically happens if the borrower pays the loan off early than 3 years. However, most prepayment penalties allow the borrower to pay up to 20% additional principle each year without a penalty. The charge is usually a percentage of the loan balance at the time of the prepayment.
Prime Rate
The interest rate banks use to price loans to their best or "prime" customers. Prime rate is associate with the rates offered by banks, lenders and credit card companies. The higher the prime rate, the higher your interest rate will be.
Qualifying Ratios
The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you could afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments, which is divided by your gross monthly income.
Secured Debt
A debt on which collateral has been pledged by the borrower. The creditor can institute a foreclosure or repossession, or take the property identified by the lien, called the collateral, to satisfy the debt if you default.
Unsecured Debt
Debt, such as most credit cards, that is not secured with collateral.
Unsecured Loan (Personal Loan or Signature Loan)
A loan based on your promise to pay without savings or other collateral as a guarantee.
VA Mortgage
A mortgage, of which only Veteran's are eligible, where the lender receives a guarantee to reduce loss from the Veteran's Administration (VA). The major advantage of a VA mortgage is that the required down payment is very low, and maximum allowable loan amounts are higher than on FHA loans.
Variable Interest Rate
An interest rate that changes up or down on a set schedule based on an economic index such as the prime rate.
