Adjustable Rate Mortgage (ARM): An ARM is an adjustable rate mortgage usually tied to what is called the federal prime rate (see below). When rates are low, you enjoy a low payment. However, they do carry some risk. If your interest goes up, your payment goes up with it.
Amortization: When you hear this, someone is essentially saying how long it will be to pay off a loan. A 30 year amortization means your loan will be paid off in 30 years assuming you keep to the payment schedule.
Annual Percentage Rate (APR): The APR is the interest rate you pay over the course of a year. It includes finance charges and the actual interest percentage. This is most likely the number you want to look for because you can then calculate how much you actually pay. It is also good for comparison shopping.
Application: An application is your request for a loan. With vehicles, you will have to submit some personal information along with pay stubs or proof of income. With mortgages, you will likely have to provide 2 years of tax returns, bank statements and other documents to verify your finances.
Appraisal: First mortgages and larger second mortgages will require that you have an appraisal done on the house before it can be used as collateral. Basically, a lender needs to know that they can recoup their money if, for some reason, you can’t pay the loan back.
Appreciation: If your house or home increases in value, then it has appreciated. So if you bought your house for $150,000, and it appraises for $200,000, then you have a $50,000 appreciation.
Assessment: Assessment is similar to an appraisal, but less comprehensive. It is used to determine how much you will be taxed on your property.
Asset: An asset is an accounting term that refers to something you own. Your house, investments, car, and retirement funds can all be considered assets depending on the situation.
Balloon Mortgage/ Balloon Payment: A balloon mortgage starts out like a typical mortgage, but it has a clause that requires the balance to be paid off in five to ten years. Generally, you would only look into this if you are planning on refinancing or selling in a few years.
Bankruptcy: There are two major kinds of bankruptcy and both are generally used when a person has overwhelmed themselves with debt. If this happens, your credit score plummets and it becomes more difficult to secure loans and good loan terms.
Bill of Sale: A written document that outlines the sale and transfer of a title or piece of property. Most high dollar purchases will use one.
Biweekly Mortgage: Biweekly mortgages are payment plans. The goal is to pay a smaller amount more often. By paying every two weeks instead of a year, you essentially add extra payments into your loan and pay it off quicker. They can be great depending on your situation.
Clear Title: Having a clear title just means that no one has a claim on the property. It is important to make sure that no one can come back later and argue ownership.
Closing: Closing is when everyone involved in a sale gets together to sign contracts and fulfill their requirements. With auto loans, this is usually just you and our loan officers. With mortgages you might have brokers, agents and bank representatives present.
Closing Costs: These are the costs to pay for everything that goes into a loan. It may be for title companies, brokers, or reports and administrative costs. With smaller loans (HELOCs, vehicles, fixed seconds, etc…) this may be a very small amount or nothing at all. With first mortgages and larger loans, you might have to pay for whatever services went into making that closing happen.
Collateral: Collateral is what you put up to secure a loan. It could be a car, a boat, a home or anything else that has documented ownership. It gives a lender rights to that property if for some reason you default. It is also the reason that some interest rates are much lower than others.
Credit Score/ Credit Rating: Credit is incredibly important to the lending process. Your history helps lenders decide if they want to lend to you and at what rate. A poor rating might exclude you from even getting a loan or make you pay more. A good rating will almost always save you a ton of money over the course of your life. Remember, you can always work to improve this.
Debt to Income Ratio (DTI): Your debt to income ratio is how much you owe compared to how much you make. Lenders need to make sure that you can actually pay back what they give you.
Deed: A deed is an official document that attests ownership and aids transfer of property. It firmly states ownership in the legal world.
Default: Default is when a borrower is no longer able to pay. If you start missing payments, a lender is going to consider you in default and you will likely start to see collection efforts.
Delinquency: Delinquency is the first stage of default (see above). If you go past your due date or grace period, you are delinquent and, again, will likely start to see collection efforts.
Deposit: A deposit is the money you put down to guarantee a sale. This could be a fixed amount or it could be a percentage depending on the loan and terms.
Depreciation: Depreciation happens when some kind of property loses value. If you buy a car for $20,000 and a few years later it is work $16,000, you have $4,000 in depreciation.
Down Payment: The money that you bring into the loan. Sometimes, especially with poor credit, a lender may require that you put something down as a personal stake in whatever you are buying.
Earnest Money: See ‘Deposit.’
Eminent Domain: This is a legal term meaning that the government may have rights to property to use for public good. Usually, if this happens, they will pay fair market price for acquisition.
Equity: Equity is the value of something minus how much is owed on it. So with a house, if it has a value of $150,000 and you only owe $120,000, then you have $30,000 in equity.
Escrow/ Escrow Account: Mortgage loans have a lot of maintenance involved (insurance, taxes, possibly PMI insurance…). An escrow account is something that your servicer will set up. It basically takes your payment and puts a little bit towards each maintenance item. With escrow, you will likely just have to deal with a single monthly payment and your servicer will take care of the rest.
Estate: Estate refers to the total of all real property that someone owns. A house, everything in a house, cars, property—all of it is considered part of the estate.
Federal Housing Administration (FHA): The FHA is part of the government that backs home loans. It is there to help people get financing. Loans made by the FHA are backed by the government which gives them typically low rates and smaller down payment requirements.
Federal Prime Rate: The federal prime rate is determined by the head of the US treasury. It is the interest used for institutions to lend money to other institutions. Essentially, the interest rate that you pay is built on this prime rate.
Finance Charge: Finance charge can describe the total cost that you are paying for the loan. With smaller loans (Visa ®, vehicles, etc…) the finance charge is typically just the normal interest that you pay. With mortgages, you might have origination fees or other items lumped into this category.
Fixed Rate Mortgage: Fixed rates are often the preferred kind of mortgage for consumers. A fixed rate will keep your payment from fluctuating. You may end up a bit higher than with a variable rate, but they are generally safer.
Foreclosure: A foreclosure is the last line of delinquency for home owners. Basically, the lender takes the property back and sells it to try and recoup the rest of the loan.
Good Faith Estimate: A good faith estimate is something you will see at the beginning of the mortgage process. It is an estimate of the lending costs to try and give you an idea of what you can expect.
Gross Monthly Income: Your gross monthly income is how much you make before taxes. Your net monthly income is what you actually take home. Generally, lenders are looking at the gross income for lending purposes.
Housing Ratio: This is the ratio of how much your home costs against your total income. Generally, lenders are looking for you to spend no more than a third of your income on your home and home loan.
HUD: HUD is the Department of Housing and Urban Development. You will see this come up a fair bit. This department regulates government lenders and might also have rights to the house that you are purchasing.
Interest Only Loan: Interest only loans are loans where people only pay the interest that accrues on a house—they never actually pay into the principle balance. They might work for some people, but the recession has shown that they can be dangerous as well.
Liability Insurance: This insurance can help protect you if you are sued. So, for example, if someone slips on the ice in front of your home you might have protection.
Lien: A lien is a claim to property. It is a stake that can protect the lender if you don’t pay your loan.
Loan Origination: Basically, this is the beginning of the loan. It includes any of the process to actually underwrite and establish the loan.
Loan Servicing: You can pretty much consider this to be all of the maintenance for your loan. Your servicer is the company that you send your check to each month (assuming they are also taking care of your escrow). With vehicle loans and credit cards, it is Arapahoe Credit Union.
Loan to Value Ratio (LTV): Most lenders rely on your collateral to back up the loan. As such, they want the value of what you are buying to be in the range of what they are lending. To determine this, they simply divide the value of the vehicle by how much you need to buy it.
Maturity: Maturity is that last payment and the moment you are free and clear. It’s yours!
Modification: While not common, it is possible to make changes to a loan. If anything changes or a new contract alters the original then you are looking at a modification.
Mortgage: Your mortgage is the loan that you pay on your home. Sometime it helps to think of your mortgage as your home.
Mortgage Insurance: Mortgage insurance covers a lender for losses on the home in case a borrower defaults. This is not the same thing as your home insurance.
Mortgage Note: This is your agreement to pay the loan. It will have all of the terms and agreements that your lender puts into it.
Origination Fee: An origination fee is the cost that a lender charges for setting the loan up for you. This can be a significant portion of your loan costs.
Pre-approval: A pre-approval is the process you take to prep so that you know what you are qualified for. It will make sure that you don’t go shopping for something out of your range and will also let us make sure you get the best deal.
Prepayment Penalty: A lot of lenders impose a pre-payment penalty, a clause in the contract that means you have to pay extra if you pay the loan early. You won’t see this on an ACU loan.
Prime Rate: The federal prime rate is determined by the head of the US treasury. It is the interest used for institutions to lend money to other institutions. Essentially, the interest rate that you pay is built on this rate.
Principle: Your principle is the amount of the loan you still carry. It does not include any interest charges. As you pay your loan down, your principle goes down. Also note that you will pay less in principle during the beginning of your loan, but that goes up and starts snowballing as you pay your loan down.
Private Mortgage Insurance: PMI, as it is called, covers lenders from high risk loans. You typically see this on FHA loans where a person doesn’t put 20% of the cost in a down payment.
Rate Lock/ Lock-in: Mortgage rates fluctuate constantly. Sometimes a rate will go down before you actually close. A rate lock will let you take an interest rate and keep it there while the process is completed.
Regulation Z: This is a law that requires every lender to be upfront with any costs involved with a loan.
Revolving Debt: Revolving debt is any loan where you have an open line of credit. That is, if you pay some back, those funds become available again. Fixed loans, on the other hand, don’t allow you to continually borrow against them.
Secured Loan: Any loan that has collateral balanced against it. Auto loans, mortgages, boat loans, etc. are all considered secured loans.
Servicer/ Servicing: See ‘Loan Servicing.’
Sweat Equity: This is the work that a borrower might put into their home. It is not a tangible, objective number.
Title: A title is the actual ownership document for a piece of property (or vehicle).