Financing Terms

Adjustable-Rate Mortgage (ARM): A mortgage loan with an interest rate subject to change over the term of the loan. The interest rate is tied to the performance of a specified market rate.

Amortization: The paying down of principal over time. In a typical mortgage loan, the principal is scheduled to be paid off, or fully amortized, over the term of the loan.

Average Hourly Earnings: A monthly reading by the Bureau of Labor Statistics of the earnings of hourly plant and non-supervisory workers in the private sector.

Basis Point: One one-hundredth of a percentage point. For example, if mortgage rates fall from 7.50% to 7.47%, then they’ve declined three basis points. A full percentage point is 100 basis points.

Cash-Out Refi: A refinancing of a mortgage in which the new principal (the borrowed amount) exceeds the outstanding principal of the original loan by at least 5%. In other words, the homeowner is taking equity out of the home.

Conforming Mortgage Loan: Any mortgage loan at or below the amount Fannie Mae and Freddie Mac can purchase and/or securitize in the secondary mortgage market.

Construction Loan: A temporary loan used to pay for the building of a house.

Consumer Confidence Index: A measure of confidence households have in the economy. Released monthly by the Conference Board.

Consumer Price Index (CPI): A measurement of the average change in prices paid by consumers for a fixed-market basket of a wide variety of goods and services to determine the underlying rate of inflation. The broadest, and most quoted, CPI figure reflects the average change in the prices paid by urban consumers (about 80% of the U.S. population). The so-called “core CPI” excludes the volatile food and energy sectors.

Conventional Mortgage Loan: Any mortgage loan not guaranteed or insured by the government (typically through FHA or VA programs).

Credit Report: A report of borrowing and repayment history for an individual.

Credit Score: A three-digit number based on an individual’s credit report used to indicate credit risk.

Employment (Payroll): The number of non-farm employees on the payrolls of more than 500 private and public industries, issued monthly by the Bureau of Labor Statistics.

Employment Cost Index: A quarterly index used to gauge the change in the cost of civilian labor that includes salaried workers.

Existing Home Sales: Based on the number of closings during a particular month. Because of the one-to-two month period between a signed purchase contract and a closing, existing home sales are more influenced by mortgage rates a month or two earlier than the prevailing mortgage rate during the month of closing.

Fannie Mae and Freddie Mac: The nation’s two federally chartered and stockholder-owned mortgage finance companies. Forbidden by their charters from originating loans (that is, from providing mortgage loans on a retail basis), these two Government-Sponsored Enterprises (GSEs) purchase and/or securitize mortgage loans made by others. Due to their directive to serve low-, moderate-, and middle-income families, the GSEs have loan limits on the purchase or securitization of mortgages.

Federal Funds Rate: The rate banks charge each other on overnight loans made between them. These loans are generally made so banks can cover their daily cash flow and reserve requirements. The federal government doesn’t actually set the fed funds rate, which is determined by supply and demand of the funds. Instead, it sets a target rate and affects the supply of funds through its own purchases or sales of securities.

Federal Open Market Committee (FOMC): The arm of the Federal Reserve that sets monetary policy, the FOMC is scheduled to meet eight times a year. The 12 members of the FOMC include the seven governors of the Federal Reserve System, the president of the New York Federal Reserve Bank, and, on a rotating basis, four of the presidents from 11 other regional Federal Reserve Banks.

Fixed-Rate Mortgage (FRM): A mortgage loan with an interest rate that does not change over the term of the loan.

Gross Domestic Product (GDP): The value of all the final goods and services produced in the U.S. over a particular period. Available quarterly from the Bureau of Economic Analysis.

Home Equity: The difference between the current value of the house and the amount of money owed on the mortgage.

Home Equity Line of Credit: An open credit line secured by the equity in your home.

Home Equity Loan: A loan that is secured by a home and limited to one lump-sum amount.

Home Improvement Loan: Money lent to a property owner for home repairs and remodeling.

Home Loan: Money provided by a bank or lending institution to pay for a home.

Homeownership Rate: The number of households residing in their own home divided by the total number of households in the U.S. The U.S. Census Bureau releases an estimate of homeownership rate based on a quarterly survey.

House Price Index: A quarterly measure of the change in single-family house prices released by the Office of Federal Housing Enterprise Oversight. The HPI is a repeat sales index, meaning it measures average price changes in repeat sales or refinancing on the same properties, and it is based on mortgages purchased or securitized by Fannie Mae and Freddie Mac. Homes with mortgages above the Fannie/Freddie conforming loan limit and homes insured or guaranteed by the FHA, VA or other federal government entity are not included in the sampling.

Housing Starts: The Census Bureau’s monthly count of the number of private residential structures on which construction has started or permits have been issued.

Interest Rate: A measure of the cost of borrowing.

Jumbo Mortgage Loan: A mortgage loan for an amount exceeding the Fannie Mae and Freddie Mac loan limit. Because the two agencies can’t purchase the loan from the lender, jumbo loans carry higher interest rate.

Loan-To-Value Ratio (LTV): In a mortgage loan, the amount borrowed relative to the value of the property. An LTV of 80% means the mortgage loan is for 80% of the value of the property, with the borrower making a 20% down payment.

Mean Home Price (of New or Existing Homes Sold): The mathematical average of the prices of all homes sold in the period, typically monthly. The mean price of homes sold generally runs higher than the median price due to the number of very high-priced homes.

Median Home Price (of New or Existing Homes Sold): The median price of all the homes sold within a 30-day period. Median home prices are generally a better indicator of home price trends than average home prices.

Mortgage: A loan lent for the purpose of buying real estate and secured by the real estate.

Mortgage Application Index (Purchase): An index published weekly by the Mortgage Bankers Association of America which gauges the number of applications submitted for the purchase of a home. The survey covers about 40% of all retail residential mortgage transactions.

Mortgage Application Index (Refinance): An index published weekly by the Mortgage Bankers Association of America which gauges the number of applications submitted for the refinancing of a home. The survey covers about 40% of all retail residential mortgage transactions.

Mortgage Broker: A person or company that acts as a mediator between borrowers and lenders.

Mortgage Calculator: An online form that calculates how much a borrower will pay each month for a home loan.

Mortgage Quote: An interest rate offered on a home loan.

Mortgage Rate: The amount of interest charged on money lent for the purchase of a home.

Mortgage Refinancing: The process of taking out a new mortgage with different terms or interest rates. The proceeds are used to pay off the original loan on the same property.

New Home Sales: A survey of builders nationwide by the Census Bureau to determine the number of contracts signed for new home.

Producer Price Index (PPI): A measurement of the average change in the selling prices of goods and services sold by domestic producers and an indicator of inflation. Released monthly by the Bureau of Labor Statistics.

Second Mortgage: A mortgage on real estate which has already been pledged as collateral against another mortgage. Typically used to draw cash from a home for other purposes.

Securitization: The pooling of mortgage loans into a mortgage-backed security. The principal and interest payments from the individual mortgages are paid out to the holders of the MBS security.

Underwriting: The determination of the risk a lender would assume if a particular mortgage loan application is approved.

Unemployment Rate: The percentage of the labor force out of work. To be considered a member of the labor force, an individual must either be employed or actively looking for employment, released by the Bureau of Labor Statistics.