Financing Glossary. Add some definition to your understanding of credit Financing Glossary Terms and conditions. Here are definitions for some of the terms you are most likely to encounter when you finance a car through a bank or at a car dealership.
Acceleration Clause: A loan provision allowing the lender to have credibility to render all assets owed to the lender promptly. The renter is in infraction of the loan provision, such as the sale of the property, or unable to make payments on time.
Adjustable Rate Mortgage (ARM): A mortgage that has an interest rate that will vary over time. Usually the adjustment is made at a predetermined time and is linked to a financial index.
Annual Percentage Rate (APR): This is related to, but slightly different than, the interest rate. This is the interest rate times the number of periods in the year. If an interest rate is 4 percent quarterly, the APR would be 16 percent. The APR supposedly makes it easier to compare different loans because it always translates the loan to a yearly figure. But some experts caution putting too much stock into the APR because hidden fees can raise or lower this figure.
Balance: The balance of the loan is the amount remaining to be paid. Each time you make a payment, the balance is reduced.
Bi-weekly Mortgage: A mortgage which requires 1/2 the normal monthly payment every two weeks. Over the course of the year, 26 half payments are made which is equivalent to 13 full mortgage payments. As a result of this extra payment the loan amortizes much faster than a loan with normal monthly payments.
Blanket Mortgage: A contract comprising of multiple amounts of property.
Borrower: A person who receives a loan and is responsible to make mortgage payments.
Bridge Loan: A loan used for someone who is having trouble selling his/her current home and needs money to buy a new home. Once the current home is sold the loan is then paid off.
Buy Down: A lower interest rate is offered through a point system set by the lender (buying the rate lower). The rate may last through the life of the loan or for only a year or so. The buy down system is a method for someone to qualify who is not suitable as a potential borrower. With a buy down the monthly payments are lowered.
Certificate of Reasonable Value (CRV): Appraisals given by an approved VA (Veterans Administration) appraiser. They are to set the maximum value on the VA mortgage loan principal.
Clear Title: A retail title, clear of questionable and controversial issues. Some lenders have a clear title as a requirement before closing.
Closing Costs: Expenses incurred by the buyer and seller in a real estate or mortgage transaction. Types of costs are recurring and non-recurring.
Commitment: A lender agreeing or committed to specific terms, on a written document, to a contractor or borrower.
Conditional Commitment: A lender making a commitment to a loan however, certain conditions must be meet before the closing date of the property.
Construction Loan: This type of loan is temporary and used for construction of buildings and homes. A construction loan also gives the contractor small amounts of money over the construction period. It is not till the job is completely finished when a permanent loan is used to pay off the rest of the construction.
Conventional Loan: Their are two types of conventional loans: conforming and non-conforming. This is any type of mortgage other then VA and FHA loans.
Credit: This word is loosely used in a number of ways. In the financial world, it means the ability to borrow money. If someone says, “She has strong credit,” it means a lending institution would gladly lend her money. A company might be given a “line of credit.”
Credit Report: A detailed report showing someone’s credit history such as credit cards (revolving accounts) and car loans (installment accounts). Some reports will also show detailed descriptions from tax liens and judgments.
Deed:The title of property, normally changed from one owner to another at closing. The deed contains information about the property and the location. It is given to the buyer at closing.
Discount Points: Decreasing an interest rate by paying fees to a lender.
DMV Fees: When buying a car at a dealership, you have to register it and pay for license plates before you can drive it away. These various fees are referred to as DMV fees. These costs might also be called title and license fees. These fees are a percentage of the purchase price of the car and will slowly decrease as the car ages and loses its value.
Down Payment: When someone buys a car, and finances it through the dealership, they are usually required to make a down payment of cash. This payment is credited against the balance of the loan. In other words, if you are buying a $20,000 car, and putting down $3,000, the loan will be for $17,000. People wishing to reduce their monthly payments can do this by increasing the down payment.
Earnest Money: Money showing evidence of good faith. The money is usually kept in safe keeping with a real estate broker or escrow company.
Equity: Equity (usually given in a percentage) is equal to the property value minus any liens.
Finance and Insurance Office: When you buy a car at a dealership, you negotiate with the salesperson. Once a deal is reached, you are escorted into the Finance and Insurance Office where the contracts are drawn up and signed. This is sometimes called F&I.
Finance: If a car is “financed,” it means you are borrowing money — either as a loan or a lease — to pay for it as you drive it. Instead of financing a car, you could buy it outright with cash. When you buy a car with cash, it immediately becomes yours. When you finance the car, the bank owns it, and holds the title, until you’ve made the last payment.
Four-Square Worksheet: A standard form, used at many dealerships, to help the salesperson keep track of the four elements of a deal as he negotiates with the customer. The squares allow him to jot down offers and counter offers for the trade-in, the price of the car, the down payment and monthly payments.
Federal National Mortgage Association (FNMA, Fannie Mae): Purchases loans from lenders and then sells FNMA mortgage backed securities on Wall street.
Federal Home Loan Bank Board (FHLBB): Financing for farmers.
Farmer’s Home Administration (FMHA): Programs that assist people who want to buy farms and homes in rural areas.
Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac): Purchases loans from members of the Federal Reserve and the Federal Home Loan Bank Systems, and sells FHLMC mortgage backed securities on wall street.
Federal Housing Administration (FHA): An agency that issues loan guarantees and administers loan programs which makes more housing available.
Fiduciary: Someone who is to act in the best interest of a client. A realtor is a fiduciary for his/her clients.
Finance Charge: Interest charged by a lender.
First Mortgage: A mortgage with precedence over the second mortgage. In the case of closing on property the first mortgage will we covered before the second.
Flood Insurance: Insurance that covers the cause of damage to a home due to flooding.
Foreclosure: Forcing the sale of property by a default stated in a mortgage, e.g. not meeting payments on time.
General Warranty Deed: The seller protects the buyer from other requisitions to the title of the property.
Government National Mortgage Association (GNMA, Ginnie Mae): Branches of a government agency HUD that purchases VA and FHA loans then sells Ginnie Mae securities to investors on Wall street.
Grantee: Buyer named in the deed.
Grantor: Seller named in the deed.
Graduated Payment Mortgage (GPM): The first few years of the mortgage payments are low then gradually increase until the loan is completely amortized.
Hazard Insurance: Fire Insurance-Insurance on the home against fire and other risks.
Homeowner’s Insurance-additional coverage against theft and liability.
HUD 1: A closing agent makes a closing document that states the settlement cost of the loan. Once the agent finishes the document it is sent to the buyer at closing.
Index: An enumeration that graphs the current economical situation. Indexes are then used to change the rate of the loan.
Interest Rate: When money is borrowed, the lending institution, often a bank, charges a small fee for this service. Interest rates are charged as a percent of the amount loaned.
Jumbo Loan: A loan larger then the regulations instituted by Fannie Mae or Freddie Mac.
Junior Mortgage: A mortgage which is in lower rank to another. In many cases, other mortgages in higher ranking to the junior mortgage will be paid first.
Lease with Option to Purchase: During the term of the lease or other defined term, the lessee has the option to purchase the property.
Lien: The claims of debt, judgment, mortgage or taxes brought against a property.
Loan Application: Detailed information required about the borrower and the property. This information must be given to the lender before a loan can be approved.
Loan origination fee or points: The fee charged by a mortgage lender or broker for originating a loan. Not to be confused with discount points which are used to buy down the rate of interest.
Loan to Value Ratio (LTV): Total amount of loan divided by the property value.
Loan Servicing: The acts of collection of loan payments, property tax and escrows, foreclosing on defaulted loans, remitting payments.
Lease: If you lease something, such as a car, you don’t actually own it. You pay a monthly fee to use the car. At the end of the lease, you return the car and owe nothing more (assuming it is returned in good condition and with the agreed-upon mileage).
Lending Institution: Any company that loans money is a lending institution. It’s sometimes thought that only banks loan money, but this isn’t true. Auto loans can be arranged by credit unions, banks or the auto manufacturer itself.
Margin: A fixed amount added to the loan index that is used to determine the interest rate on an adjustable mortgage.
Mortgage: A written statement that forms a lien on property as security for the payment of certain debts.
Mortgage Backed Security (MBS): A bond that is protected/secured by mortgage loans.
Mortgage Banker: One who has expertise in originating mortgage loans, servicing mortgage loans, and selling mortgage loans to investors.
Places appropriate loans with borrowers and lenders. Eventually they (mortgage brokers) are paid when there is a closing on the loan.
Mortgagee: The lender.
Mortgagor: The borrower.
Mortgage Note: A written statement that holds the party responsible (mortgagor) for paying off the loan. The statement is in secured by a mortgage and is used as proof to show indebtedness. In general, the note shows the debt that the mortgage covers and holds the mortgagor responsible for repaying.
Negative Amortization: When monthly payments do not cover the interest there is an increase in the principal balance. This is means that the principal balance will increase.
Non-conforming loan: Loans that do not follow the guidelines set by Fannie Mae and Freddie Mac.
Note: An instrument that recognizes a debt and acknowledges the need to pay.
Notice of default: A notice sent to the wrongful party as recognition of a default made.
Open End Mortgage: Allowing a mortgagor to obtain more money under the same mortgage. There may be some conditions and stipulations to follow however.
Origination Fee: Fee charged in for the service of originating a mortgage loan.
Permanent Loan or Mortgage: A mortgage that is kept for a substantial amount of time.
PITI (Principal, Interest, Taxes, and Insurance): All of these can be joined into one monthly mortgage payment.
Points: Origination and discount points paid to a lender, e.g. 2 points = 2% of the total loan. If a a loan is $200,000 then 2 points is $2,000.
Portfolio Loan: A type of loan that is held by the bank and is not to sold on the secondary mortgage market.
Prepaid Interest: Prepaid interest is the interest charged to borrowers at closing to pay for the cost of borrowing for the remainder of the current month.
Prepayment: The ability to make a principal payment in full or part before the due date of the loan, e.g. advance monthly payments, refinance…
Prepayment Penalty: Fees assessed when the borrower pays of a mortgage before it is due.
Primary Mortgage Market: Companies like banks, savings and loans, credit union, etc. that originate and service mortgage loans make up the primary mortgage market.
Prime Rate: Short term loans with very low interest rates are often offered at the lowest commercial interest rate available. These loans are normally only available to the most credit worthy customers.
Principal: Balance owed on a loan.
Private Mortgage Insurance (PMI): Some lenders will allow a down payment smaller then the one normally required if the borrower purchases private mortgage insurance which guarantees the repayment of the mortgage under certain terms.
Real Estate Settlement Procedure Act (RESPA): Treatment, stated by law, given to people who file for loans and mortgages on 1-4 units, e.g. a lender is required by law to give a good faith estimate of closing costs within 5 days of someone filing for a loan.
Refinancing: The ability to repay an established loan with the monies from a new loan on the same property.
Recording: Processing information into a database that would affect the title of property. Lenders require that a deed of trust or a mortgage be recorded as evidence of debt.
Rescission: The ending of contract. When refinancing a mortgage on property, requires the borrower/owner to cancel the contract within 3 days if they decide not to proceed with the refinancing.
Regulation Z (Reg Z): Regulation set by the federal government requiring creditors to give the full terms and agreements of a loan and the APR (annual percentage rate) to a borrower.
Reverse Mortgage: A mortgage used by the elderly in which they receive an income (payments) as long as they are alive. The principal of the loan increases as these payments are made, hence the term reverse.
Rollover Loan: A loan that is long term (e.g. 30 years) were the interest rate is kept lower for a shorter number of years (e.g. 5). This type of loan can either be rolled over or extended based on the terms of the loan at the end of the shorter period.
Secondary Mortgage Market: The ability to sell mortgages, loans and savings to investors like Fannie Mae and Freddie Mac.
Second Mortgage: Used in the addition to the first mortgage. Second mortgages usually carry higher interest rates and are known as a higher risk to investors due to the fact that they are subordinate to any first mortgages.
Security: In the case of debt property is used as collateral.
Servicing: The servicing of a mortgage by billing, managing, filing, and collecting.
Settlement Statement: A closing agent makes a closing document that states the settlement cost of the loan. Once the agent finishes the document it is sent to the buyer at closing.
Standard Uniform Loan Application (Form 1003): A standard loan application.
Subordination: A loan with a lower priority than another, e.g. a second mortgage lien is subordinate to a first mortgage lien.
Sales Tax: When someone buys an item, they are charged a percentage of the purchase as state sales tax. The actual percentage varies widely from one state to the next and, often, within the state. The sales tax is often made up of a state tax and a local tax. These two are combined for one grand total. On small items, the sales tax doesn’t seem significant. But when purchasing a car, it can be a large factor that affects the total cost of ownership.
Teaser Rate: A mortgage with a low starting interest rate normally used to attract prospective borrowers.
Title Insurance:A policy usually for the buyer and the lender. The insurance policy is created as protection from loss and damage caused by problems in the title.
Title Search:A search conducted to conclude the ownership of property.
Transfer Tax: After the sale of property taxes are taken out and divided between the state, county, city, and other government agencies.
Truth in Lending: Federal Regulation Z defines truth in lending.
Term: This is the length of the loan, usually stated in months. Common terms for car loans and leases are 36, 48 or 60 months.
Title: A title is a legal document providing specific information about the vehicle and stating who owns it. If you borrow money from a bank to get a car, the title will be held by the bank until you make all the agreed-upon payments.
Underwriting: A background check given to a future loaner based on the criteria of assets, credit, income, employment, etc. of a potential borrower.
VA Loan (U.S. Veterans Administration): Allows veterans to receive a loan without putting money down and is guaranteed by the U.S. Veterans Administration.
Variable Rate Mortgage: Adjustable Rate Mortgage
Verification of Deposit (VOD): Verification of account balance and history. This information must be verified through the borrower’s bank.
Verification of Employment: Verification that a borrower is employed. The documents states the starting date, job title, salary, and probability of future employment.
Wraparound Mortgage: The addition of a new loan to the already existing loan.