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 Planning
on taking out an adjustable-rate mortgage? Here are some definitions
that should help make the ARM loan document understandable:
Annual
Percentage Rate (APR) -- The total cost of the loan, expressed
in the simple percentage of interest charged each year. It takes
into consideration interest, points and closing costs.
Adjustable-Rate
Mortgage (ARM) -- A loan agreement, secured by property,
in which the annual percentage rate may change according to a schedule
identified in the contract.
Assumable
Mortgage -- A loan that can be passed from seller to buyer
at the time property is sold. Lenders may or may not reserve the
right to approve the buyer as borrower.
Cap
-- The top limit on the amount the interest rate can increase during
a single time period of an adjustable-rate mortgage. Every ARM has
two caps: a periodic cap, which limits the intermittent changes
to the interest allowed in the loan agreement, and a lifetime cap,
which governs the total increase that can be imposed during the
life of the loan.
Conversion
clause -- A provision that may appear in an adjustable-rate
loan agreement allowing the loan to be changed to a fixed-interest
rate loan, usually for an additional charge.
Index
-- A statistical composite that is used as a standard to
measure the condition of the economy. One of several indices --
for example, the Prime Rate -- may be used as the basis of computations
in determining an interest rate for a loan.
Margin
-- Expressed as percentage points, the amount that a lender adds
to an index to arrive at the final interest rate.
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