Financial Terms & Definitions Flashcards
Accrued interest
the amount of interest on a mortgage that has been earned but has not yet been paid. Each mortgage payment that a borrower makes is applicable to accrued interest first, then to principal.
Daily simple interest
interest accruing on a loan on a daily basis, calculated by counting the number of days between the date of the last payment received and the date on which the current payment is received.
Deed
a written instrument properly signed and delivered that conveys Title to real property
Deed of trust
in many states, a form of security agreement used to pledge a borrower’s real property as security for the payment of a note. It is a three-party instrument in which the borrower assigns his/her ownership interest to a trustee who may sell the property and apply the net proceeds of the sale to the outstanding debt if the borrower fails to pay the note as agreed. This is in contrast to a mortgage (a two-party instrument) which assigns the borrower’s ownership interest to the lender who may sell the property for non-payment of the debt.
Discount points
discount points are a tool that borrowers can use to reduce the minimum payments required. Points or discount points are fees that borrowers can pay to a lender to lower the interest rate on a mortgage. Each discount point costs 1% of the amount of the loan. The use of discount points to lower the rate of interest for the full term of a loan is known as a permanent buy-down.
Whether it makes sense financially to pay points to obtain a permanent buy-down will depend on how long the borrower intends to hold onto the property he/she is purchasing. Lenders or mortgage brokers can help borrowers to determine how long it will take them to recoup the cost of the points paid to reduce the interest rate.
Foreclosure
foreclosure is the sale of property after a borrower’s default on payments to satisfy the unpaid debt or breach of the loan contract. The exact procedure that the lender follows in order to foreclose on a piece of property depends on the presence or absence of a power of sale clause in the mortgage or deed of trust and the jurisdiction in which the property is located. If the
mortgage or deed of trust does not include a power of sale clause, the lender must file a lawsuit, requesting the court to enter an order of foreclosure. This type of foreclosure is known as a judicial foreclosure. When the mortgage or deed of trust includes a power of sale clause, the lender is not required to file a lawsuit in order to begin foreclosure proceedings.
The power of sale clause authorizes the lender or trustee to sell the property to pay off the balance on the loan. This type of foreclosure proceeding is known as a non-judicial foreclosure.
Fully-indexed rate
the interest rate that is calculated for rate adjustments for ARMs by adding together the index and margin
Index
a published benchmark interest rate that, when combined with the margin, is used as the basis for adjusting the interest rate for an ARM
Interest
interest is the money that a lender earns from a loan. The rate of interest that a lender charges for a mortgage depends on the current market rates for the type of loan that the borrower is seeking and the qualifications of the borrower. The portion of each mortgage payment that represents a payment of interest on the loan depends on the type of mortgage that the borrower has chosen. The most common payment program includes monthly payments of the interest due and payment of enough of the principal to ensure that the principal is paid in full at the end of the loan term. This type of payment program is known as mortgage amortization. Amortization tables allow lenders to look up pre-calculated monthly payments for loans with fixed interest rates.
Other payment programs include:
▪ Negative amortization: negative amortization occurs when the mortgage payment is less than the interest currently due. The payment does not include any amount to reduce the principal balance, and because it does not include enough to pay the interest due, the loan balance increases over time. The primary reason that a borrower would agree to a payment plan that includes negative amortization is to reduce the size of payments at the beginning of the term of a loan. Many predatory lending laws try to protect consumers by prohibiting the use of negative amortization in high-cost loans.
▪ Partial amortization: partial amortization occurs when the mortgage payment includes the interest due and a small payment towards the principal that is not adequate to reduce the principal balance to zero by the end of the loan term.
▪ Interest-only loan: with an interest-only loan, the borrower pays the amount of interest due each payment period but makes no payment toward the principal. Therefore, at the end of the loan term, the borrower owes as much principal as he/she owed at the beginning of the term.
Loan-to-value ratio
the loan-to-value ratio describes the relationship between the value of a home and the mortgage loan for which it is serving as security
Mortgage
a two-party instrument which assigns the borrower’s ownership interest to the lender who may sell the property for non-payment of the debt.
Premium pricing
a credit from the lender for the interest rate that is chosen on a mortgage loan. Premium pricing may be used to pay closing costs or prepaid items.
Promissory note
neither a mortgage nor a deed of trust contains a borrower’s contractual promise to repay a loan. The note, or promissory note, is the borrower’s promise to repay the loan. The note includes:
▪ Identification of the borrower and the lender
▪ The borrower’s promise to repay the loan, and at what intervals (e.g., lump sum at term
end; monthly installments; etc.)
▪ Amount of payments to be made
▪ Amount of the loan
▪ Interest rate charged on the unpaid principal
▪ If an ARM, rate change adjustments scheduled and accompanying details
▪ Period of the term for repayment of the loan
▪ Reference to the real estate used to secure the loan
▪ Provisions for the imposition of late charges for overdue payments
▪ Signature(s) of borrower(s)
As the document that contains the borrower’s promise to repay the loan, the note is the most important document in a lending transaction. Furthermore, the note is one of the documents that determines the rights of the parties if a dispute arises regarding the terms of the loan; the other is the security agreement or mortgage/deed of trust.
Securitization
the process of pooling similar types of loans to create mortgage backed securities for sale in the financial markets
Settlement
settlement is the meeting between the borrower, the lender, and the seller where the property and funds are legally transferred. “Settlement” is often used interchangeably with the terms “consummation” and “closing”; however, it should be noted that consummation does not always occur at the same time as settlement.
