|APR - Annual Percentage Rate||A calculation of the interest rate you are "actually" paying. This takes into account the closing costs, including costs such as discount points and bank fees.|
For example, a 30 year mortgage with a 5% interest rate, 1.25% points, plus other closing costs, can have an APR of 5.1375%.
This allows you to compare loans with different rates, discount points, and closing costs.
While APR is a useful way for comparing mortgages, it has 2 shortcomings.
|ARM - Adjustable Rate Mortgage||A mortgage with an interest rate that varies over time. The basis for the interest rate change and the timing are specified in the mortgage terms.|
|ARM Caps||ARMs have a limit on how much the interest rate can increase at any reset period.|
This is often described in the form (6/2/6).
|ARM IO||An adjustable rate mortgage where only interest is paid in the initial period. No principal is paid. Once the loan resets, the payments follow a traditional ARM, with interest and principal paid in each period.|
|Closing Costs||Additional costs required for closing a loan.|
For a mortgage, typical closing costs include:
- Application and origination fees
- Attorney costs for the bank and you
- Lien and Title searches
- Survey costs
- Taxes and recording fees
- Title Insurance
For the calculations, 3% additional closing costs are assumed.
|Conforming Mortgages||These loans qualify for purchase by the government backed agencies FNMA and FHLMC. FNMA and FHLMC provide the money for the loans.|
These loans have lower interest rates than non-conforming loans, but also have much stricter qualification requirements. Requirements include higher credit scores, larger down payments and lower monthly payments as a percentage of the borrower's income.
Go to Conforming Loan Limits Help Page for further information.
|Discount||Additional fees paid at the closing of a mortgage.|
Paying a higher discount often results in a lower mortgage interest rate.
The discount is usually tax deductible.
Go to the Quick Start Guide to learn more about the tradeoffs between discount points and a higher interest rate.
|FNMA and FHLMC||These government agencies provide the money for home loans. The borrowers and loan sizes must fit within specific characteristics to qualify. Since these are government agencies, they can lend money at lower rates than other lenders.|
FNMA and FHLMC loans have maximum loan amounts of $417,000. In some high cost areas, like New York City, the agencies will lend money up to a loan size of $797,750.
Consult your lender to see if your loan will qualify for these lower rates.
|Forward Rates||The financial markets estimate people's views of interest rates in the future, based on the concept of forward rates.|
For example, there is a 1 year treasury yield today, and a 2 year treasury yield today.
However, this does not guarantee that this is what the 1 year interest rate will be in 1 year's time. It is only a calculation based on current rates, which represent current views about financial markets.
|Jumbo Mortgages||Loans that do not qualify for FNMA and FHLMC purchase, based on being above the loan size limits. These typically have higher interest rates than conforming loans. As opposed to being bought by FNMA or FHLMC, the money for these loans is supplied by banks or other investment companies.|
Go to Conforming Loan Limits Help Page for more information.
|LIBOR (London Interbank Offering Rate)||Index used for many ARM loans. Based on the lending rates between banks in London, England. Most important to borrowers, it is typically between 0% and 1% more than treasuries. However, it can vary much more than that on occasion.|
|Payback Months||Also called breakeven months.|
When refinancing a loan, this is the number of months it takes for the monthly savings to offset the refinancing costs.
Your monthly savings is the difference between the new loan montly payment and your current loan monthly payment.
This only applies if the new loan monthly payment is less than the original loan monthly payment.
|PMI (Private Mortgage Insurance)||PMI is usually charged when a loan is > 80% of the market value of the house.|
It is for an insurance on you paying your mortgage payment.
It is added to the interest rate, but is not tax deductible. At the point the loan balance < 78% of the market value, most lenders will allow you to eliminate this payment. You will need to contact them.