Lending Terms

Conventional 30 year fixed rate loan: This is a loan where the payments are determined over a 30 year period. A small amount of principal and the interest are paid in each payment. The payments on the loan amount are then fixed for the term of the loan. At the beginning of the loan, most of the payment is interest. At the end of the loan, most of the payment is principal and therefore reduces the remaining principal of the loan. In this type of loan, any amounts paid above the payment, you want to apply to the principal. This will shorten your loan period and correspondingly reduce the interest paid on the loan. This is commonly referred to as interest avoidance.

Adjustable Rate Mortgage : This is a mortgage where the interest rate is not fixed or unchanging as in the 30 year fixed rate loan. In this type of mortgage, the interest rate (and therefore your payment) can change periodically. Typically these changes in the interest rate are based on an index. (A commonly used index is called LIBOR for example). Since we have had historically low interest rates these past 24 months, the pundits feel that the only direction future interest rates could go is generally up in the longer term. This suggests that ARM loans would be at a higher interest rate in the future (and therefore higher payment) in the future. After explaining different types of ARM loan products to people, they often ask us why anyone would ever use one. This shows us that they may better understand the issues of ARM loans when this question is asked. There are however instances where this type of loan has an advantage. Contact us and we can explain issues and advantages surrounding each loan type and how it may apply in your situation.

Balloon payment : This is a loan that is due in a shorter period of time. For example, you could have a loan with a 5 or 7 year balloon payment. This means that your payment may be at an interest rate (typically lower) and then the loan ends at the end of the term (example is 5 or 7 years). At this time, you may have moved on, or you may need to refinance the remaining amount of the loan into a new loan.

Foreclosure: This happens when the borrower is not making their payments and the bank or lender take over the ownership interest in the property. The legal process takes time and involves eventually a forced sale at public auction with the proceeds going back to the mortgage holder of that property. Contact us for further details if you have questions on the process itself.

Interest-only loans : In more conventional loan types such as a 30 year fixed rate loans, each payment you make has the interest charge plus some principal amount to incrementally reduce the loan amount you have on the property. In the interest only loan products, you pay only the interest and the principal does not decline. Often, the interest-only loan products last only for a period of time and then convert to a principal and interest loan type. When this happens, your payment can increase substantially once they convert to P&I payment loans (principal + interest). At this point, an interest rate loan is often much like an ARM loan and is based on an index such as the libor.

Negative Amortization loans: This is where the loan allows you to make a lesser payment for a period of time, but adds the unpaid interest to the balance of the loan. In this scenario, you end up owing more on the loan over the given period of time that the lesser payment is offered.

Option ARMs: This is a loan product that allows you to make the ‘optional' payment. You can make a full principal and interest payment, or you can make interst only payments, or you can make a minimum payment determined by the lender. If the borrower makes minimum payments, they could again have negative amortization. This is where the loan balance increases, not decreases.

Point: We are often asked what a point is. A point is equal to 1% of the principal amount that you borrow. (for example and using a fixed 30 year mortgage product: If the price of the home is $250,000, the buyer puts down 20% or $50,000, then borrows the remaining $200,000. The lender may say that the current interest rate is $6.25%, but if the borrower pays 1 point, they will reduce the loan amount to 6% for the term of the loan. 1 point would be $2,000, or 1% of the $200,000 borrowed)

Predatory Lending: This is the term used when the lender makes a loan knowing that the borrower is likely to default and not be able to pay it back. This almost always ends up being due to higher interest rate charging in the mix.

Prepayment penalty: A fee charged to a borrower if they pay off a loan (or refinance and therefore pay off the old loan) within the pre-payment penalty period of the loan.

Short Sale: This is where a borrower is defaulting on their loan and the bank says that they will accept a lesser amount for the pay off of the loan and allow the borrower out of the loan without further penalty.

Stated Income loans: This is a loan used for borrowers who may be self employed and not have fully documented income. This type of lender states that their income is $X and the lender can determine that that is reasonable or not. If reasonable, the lender then determines their risk. These types of loans come at a higher interest rate.