Synonyms: Variable Rate Mortgage, Tracker Mortgage
Definition: A mortgage loan where the interest rate is periodically adjusted to match an index linked to the cost to the lender of obtaining cash for the loan. In the United States, the loan is generally regulated by the Federal Government with a cap on the amount of interest chargeable by the lender.
Adjustable Rate Mortgages generally allow the lender to pass some of the risk of carrying debt to the borrower. If averages interest raise rise or fall, an ARM’s interest rate will follow. This can help borrowers in times of lower interest rates, but if locked-in, can hurt a borrower should interest rates increase.
See Also: Fixed-Rate Mortgage, Interest-Only Mortgage
Definition: The gradual repayment of a loan. When you take out a line of credit, be it a mortgage, credit card, or auto loan, you are generally asked to pay a payment which not only covers the accrued interest for the month, but also a part of the principal. This gradual reduction of the loan amount is the amortization. It means that if payments are made and new credit is not taken out, you will eventually be able to pay off your loans.
Amortization may also refer to the amortization period of your loan. That is the amount of time in which you are scheduled to have your loan paid in full. Generally, longer amortization periods result in lower payments at the expense of more total interest paid, while shorter amortization periods result in larger payments but less interest paid over the life of the loan.
See Also: Adjustable Rate Mortgage, Fixed-Rate Mortgage, Interest-Only Mortgage, Negative Amortization
Definition: The annual interest rate after it has been compounded, with fees. A more accurate representation of true interest for a loan or credit card than the advertised annual percentage rate.
To calculate the EAR form the APR, the following formula gives a close approximation:
(1+ APR/n)^n
For example, an advertised APR may be 9.99%. If this is compounded monthly, the actual rate is 9.99% divided by twelve, giving us a monthly interest rate of 0.8325% adding to the balance each month and compounding the next month. This gives an effective APR of 10.46%. This calculation would not include the fees associated with the credit line.
Click here for the Nominal Annual Percentage Rate (APR).
Definition: The overall interest for a loan per yearly period. This is the sum total of the interest rate charged over the compounding period (usually daily or monthly) and so does not represent the actual interest accrued.
For example, an advertised APR may be 9.99%. If this is compounded monthly, the actual rate is 9.99% divided by twelve, giving us a monthly interest rate of 0.8325% adding to the balance each month and compounding the next month. This gives an effective APR of 10.46%.
While not an accurate reflection of the interest being charged, the APR can provide a way to quickly compare lenders. The calculation can vary between lenders, so it is important to read the APR section of the loan or credit card contract.
See Effective Annual Percentage Rate for more information.
Definition: Any overdue payment amount on a debt owed. Mortgage arrears mean you have fallen behind on your mortgage loan, and arrears on credit cards mean that you have not made at least the minimum payment toward your credit card bills.
Arrears cannot only negatively effect your credit if late or missing payments are reported to the credit bureaus, but can increase the amount you owe due to fees. If your arrears on a debt are large enough, your creditor may send your debt to a collection agency for collection.
If your arrears grow too large, you may need to file for bankruptcy protection. If your mortgage loan falls into arrears, you may be forced into foreclosure proceedings.
See Also: Bankruptcy
Definition: A levy the Internal Revenue Services (IRS) can put on your bank accounts or holdings with financial institutions. Using a Bank Levy, the IRS can force your financial institution to deduct some of your account holdings and send it directly to the IRS to pay back taxes.
The IRS is not the only government agency that is capable of garnishing your financial accounts with a Bank Levy. In many jurisdictions, agencies like Child or Spousal Support Enforcement, Fraud Investigation, or Judicial Courts may be able to establish a Bank Levy if you owe money to the government or a third-party whose interests are protected by the government.
Definition: A legal process entered into by those who can no longer pay their debts. Bankruptcy can afford you time to pay off your debts. Generally during bankruptcy proceedings, your assets are given to an official receiver who will liquidate them to pay off your creditors. When filing for bankruptcy, it is important to list all of those to whom you owe a debt.
Often, once the process is completed, any outstanding debts at the end of the proceedings are written off. However, a bankruptcy will stay on your credit report for at least 10 years and you may find it hard to obtain new credit for some time after you have filed for bankruptcy.
For those who have fallen into arrears, this may be the best option for resolving debt and moving on.
See Also: Arrears
Definition: A comprehensive report on your credit history maintained by each of the credit bureaus. The credit report includes a your previous lines of credit, loans, payments (late or on-time), bankruptcies, and any recent requests for new credit. Lenders, phone carriers, employers, utility companies, and landlords may request your permission to obtain your credit report information to establish your ability to make and keep up on your obligations.
The big three credit bureaus are TransUnion, Equifax, and Experian, and each may weigh each of the factors in your credit report differently, providing differing information or different scores, which are taken into account by those who make requests for your information.
You are entitled to receive a free copy of your credit report once every 365 days. Visit the credit bureau websites to learn more.
See Also: Credit Score
For more information about your credit report, see:
The 5 Keys to Maintaining Good Credit
Definition: Your credit score is a measure of the risk you pose to money lenders. It is based on a number of factors included in your credit report and is a large factor in determining both whether a lender will loan you money and the interest rate that money will be loaned out at. In general, the lower your credit score, the higher the interest rate if you are able to secure a loan. The higher your score, the better your rate.
There are a number of reputable sites that will allow you to check your credit score and monitor your credit report, including the websites of Transunion, Equifax, and Experian, for a low fee.
See Also: Credit Report
Definition: The process of taking out a single large loan to pay off all or some of your existing debts.
The benefit of debt consolidation is that you may be able to take out a loan at an interest rate lower than what you are currently paying on your debts. It may also be possible to spread your payments out over a longer period, lowering your monthly payment. However, if the loan period is extended, you may end up paying more over the life of the loan.
If you have fallen into arrears or are heading through foreclosure proceedings, it may be difficult to obtain a debt consolidation loan. If you have not yet fallen behind on your payments and can find a loan more agreeable than your current combination of credit card and bank loan debt, you may wish to consider debt consolidation.
See Also: Amortization, Arrears, Bankruptcy
Definition: An agency of the United States federal government within the Department of Housing and Urban Development. The FHA provides mortgage insurance for qualifying residential mortgages and sets the standards for housing construction and loan underwriting.
Should you be a qualifying low to middle-income household, you may be able to receive mortgage insurance through the FHA at a lower cost than traditional mortgage insurance. The FHA does not loan money, so you must still see a financial institution and, possibly, your local housing authority to see if you qualify.
Website: http://www.fha.gov
Synonyms: Conventional Mortgage, Traditional Mortgage
Defintion: A mortgage, usually of a period of 15 to 30 years, taken out with a financial institution at an interest rate that remains the same throughout the life of the loan.
This type of loan can be compared to an Adjustable Rate Mortgage. The benefit of a Fixed-Rate Mortgage is that you will always have the same payment over the life of the loan, making it easier to budget. The downside when compared to am Adjustable Rate Mortgage is that, should average national interest rates be lowered after you take out your loan, your rate will remain the same. However, should those rates increase after you sign your loan, your mortgage interest will still remain the same, whereas the interest rates on an Adjustable Rate Mortgage would increase.
See Also: Adjustable Rate Mortgage, Interest-Only Mortgage
Definition: An agreement to pay back debts owed, often to tax institutions, over an installment period. This usually takes the form of monthly payments.
Defintion: A mortgage in which the borrower must only pay the loan’s accrued interest for a certain number of years. After the period is up, the payments will increase and the borrower will begin to pay both the interest and the principal (the money borrowed) on the loan. This can be a significant increase in the monthly payment, as the time period to pay back the loan itself has been shortened.
Consider if you were to take out a 30-year interest-only mortgage with five years of interest-only payments instead of a fixed-rate mortgage. Initially, the payments will be lower, since you are only paying the interest. However, when you first five years are up, you must now pay the entirety of your loan over the next 25 years, whereas that same amount would have been spread out over the entire 30 year period for the fixed rate mortgage.
Only after the interest-only period expires will your loan begin to amortize. Thus, in the end, you will pay more out of pocket over the life of the loan than with other loan variants.
See Also: Amortization, Fixed-Rate Mortgage, Adjustable-Rate Mortgage
Definition: The minimum payment due by the borrower on a loan or line of credit.
In special offers or non-traditional loans, this may be less than the interest that has accrued over the past month. If this is the case, you can experience negative amortization and owe more money than you did before you made your payment.
With credit cards, this amount may only barely cover the accrued interest. Which means most of your minimum payment will be used to cover the interest and less will be used to pay down what you owe, extending the life of your credit card bills.
If you can afford to do so, it is often better to pay more than the minimum monthly payment, to ensure that you are able to reduce the principal you owe on the loan.
See Also: Amortization, Negative Amortization
For more information, see:
Definition: The opposite of amortization on a loan, where the total amount owed increases when you pay it as opposed to decreasing. This is a common feature of special offers and nontraditional mortgages, where an advertised minimum monthly payment may not cover the interest accruing on the loan and thus, add to your total amount load.
Consider if you were to take out a $30,000 mortgage with monthly interest of $250, but an advertised minimum monthly payment of only $150. If, in the first month you choose to make the minimum monthly payment, then you will owe:
$30,000 + $250 – $150 = $30,100
This is an increase of $100 and so the amount of interest on your loan will also increase, since you have now borrowed more money.
See Also: Amortization, Minimum Monthly Payment (MMP), Nontraditional Mortgage
Synonyms: Alternative Mortgage, Exotic Mortgage
Definition: Mortgage loans which are generally more complex than traditional loans (adjustable rate mortgages and fixed-rate mortgages), and present a greater risk of negative amortization.
Though Nontraditional Mortgages may offer a borrower greater flexibility, the complex terms may lead to financial hardship and increased payment obligations in the long-term. Types of nontraditional mortgages include interest-only mortgages, piggyback loans, or mortgages with extended payback periods of 40 or 50 years.
See Also: Amortization, Negative Amortization, Adjustable Rate Mortgage, Fixed-Rate Mortgage, Interest-Only Mortgage
Definition: To have some or all of the penalties removed on debt owed. Penalties may be accrued on both taxes owed or as a result of breaches of contract signed with a lender during a loan agreement. Penalty Abatement may occasionally be negotiated as part of a settlement or installment agreement as a good faith show on the part of the tax entity or financial institution and to reduce the likelihood on the part of the credited for additional failure to pay.
Definition: Insurance generally required by the lender, to be paid by the borrower, when the borrower has made less than a 20% down payment on the mortgage. This insurance helps to protect the lender if the mortgage enters default.
You must apply for private mortgage insurance like you would a mortgage and you may not qualify. It is possible to qualify for the mortgage, but not the private mortgage insurance. In this case, it may not be possible for you to take out a mortgage, even if you are qualified with the bank or other financial institution.
Some borrowers may qualify for government-subsidized private mortgage insurance through the Federal Housing Administration. The cost may be lower than through a larger private insurer.
See Also: Adjustable Rate Mortgage, Fixed-Rate Mortgage, Federal Housing Administration (FHA)
Defintion: The use of legal strategies to reduce tax debt owed to the government. Unlike tax evasion, tax avoidance relies upon means which are in the boundaries of the law.
Tax Avoidance is often practiced by wealthy individuals and corporations. In 2009, the U.S. government reported almost 1,500 citizens with annual incomes of $1 million or more who had a net tax liability of $0 or less. Additionally, the United States Government Accountability Office performed a study showing that 55% of corporations had at least one year between 1988 and 2005 in which they did not owe taxes.
Definition: The crime of knowingly refusing to pay taxes owed to the government on income. In the United States, the crime is a felony. In most developed countries, a person who commits and is convicted of tax evasion can be fined in addition to the taxes owed or even imprisoned. Governments target tax evasion extensively and the IRS takes it very seriously.
In the United States, the total amount of under or unreported income exceeds $2 trillion, creating a tax gap of $400-500 billion. Those considered most likely to commit tax evasion in the U.S. are males under the age of 50, with earnings placing them in the highest tax bracket, and who have complicated tax returns.
Definition: A tax lien is a lien against property, such as real estate or automobiles, that allows the IRS to seize your property to pay back taxes. A tax lien will appear on your credit report and can seriously impact your credit score. Though a lien does not mean the government will seize your property, it does give them the option. It is also a declaration that in sale, bankruptcy, or foreclosure proceedings, the IRS may be able to levy money made on the value of the property to pay back taxes.
Liens may also be established by other government agencies, such as Child or Spousal Support Enforcement or the town you live in, if they deem that you have not paid money owed.
Definition: A levy the Internal Revenue Services (IRS) can put on your wages. Using a Wage Levy, the IRS can force your employer to deduct some of your wages and send it directly to the IRS to pay back taxes.
The IRS is not the only government agency that is capable of garnishing your wages with a Wage Levy. In many jurisdictions, agencies like Child or Spousal Support Enforcement, Fraud Investigation, or Judicial Courts may be able to establish a Wage Levy if you owe money to the government or a third-party whose interests are protected by the government.
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