Glossary of Terms
Adjustable-rate mortgage (ARM): A mortgage that starts out with one interest rate for a period of time and then “resets” to a new interest rate.
What you should know: The starting interest rate is often enticingly low. The new interest rate will be higher — and your monthly loan payments will get bigger. That’s called payment shock.
2-28 ARM: An adjustable-rate mortgage that has a fixed interest rate for two years. Then, the interest rate begins to float, based on an index, plus a margin. Typically, these adjustments increase interest rates every six months, which is why they are often referred to as “Exploding ARMs.”
Equity: The value of your home, minus what you owe on it. If you owe $80,000 on a house you mortgaged for $100,000, your equity is $20,000. When your house falls in value below what you owe on it, it’s called negative equity. On the bright side, if your home rises in value, so does your equity.
Fixed-rate mortgage: The interest rate is locked in — and your monthly payments remain the same — for the term of the loan. Also called a conventional mortgage.
Forbearance: A lender agrees to let a borrower postpone payments or pay a lower payment for a temporary period to give the borrower time to catch up on late or missed payments. More information is available at makinghomeaffordable.gov.
Mortgage broker: Brokers are not lenders; they find mortgage loans for borrowers. Brokers are compensated directly by borrowers — usually a percentage of the total loan, plus other fees. They have no legal obligation to work in the best interests of borrowers. Sometimes, brokers are paid a commission by lenders based on the profitability of the loan, which again works against the interests of the borrower.
What you should know: The majority of sub-prime loans were originated by mortgage brokers.
Predatory lending: Loans that victimize borrowers with excessive or hidden fees, high-interest rates, steep prepayment penalties and other terms that trap borrowers in debt.
Repayment Plan: An Agreement to pay the overdue payments over a period of time by adding an extra amount to your monthly payment.
Reset: See balloon mortgages and adjustable rate mortgages.
Short sale: When the sale of your home brings less than the outstanding loan, lenders may agree to forgive the difference.
Sub-prime mortgages: The word “sub-prime” is applied to a wide range of mortgages that have a common characteristic: risk. In general, sub-prime mortgages are aimed at borrowers with less-than-perfect credit histories and may offer “creative” financing approaches: adjustable rates, balloons, interest-only, no down payments, little documentation.
Trial Modification: Generally used for the Making Home Affordable Modification Plan in which the homeowner agrees to make three months of a modified payment before it is modified on a permanent basis. There is no grace period for these payments.