ADJUSTABLE RATE MORTGAGE (ARM):
Adjustable Rate Mortgage (ARM): Unlike a standard fixed rate mortgage, an ARM is a mortgage with a variable interest rate. ARMS may be linked to a published interest rate index, to which the lender adds a margin.

An ARM may have an initial fixed rate period followed by a variable period. For example, a 5/1 ARM would have a fixed rate for the first five years, then reset every year afterwards.

Most ARMs are quoted with caps which limit the amount that the rate can reset in any given year, as well as a lifetime cap which limits the amount the rate could rise or fall over the life of the loan.

ARMs are usually linked to a published index, such as the yield on 1 year maturity United States Treasury securities.  These rates have fluctuated widely over the years, as the following chart shows:

The rates above are taken from the Federal Reserve Board Statistical release.  To see more visit the website at www.federalreserve.gov.

Like all financial instruments, ARMs have pros and cons:

• Pros:
  In low interest rate environments ARMs offer very low rates compared to 30 year fixed mortgages.
  
  ARMs allow the mortgage holder to take advantage of downward trending interest rates in the future
  
  
• Cons:
  Uncertainty: Mortgage payment will change over time
  
  Payment will increase when rates go up

AMORTIZATION:
Amortization consists of the calculation of a payment stream, usually of equal payments, that when made over a predetermined period of time will result in the full repayment of a loan amount.  Each payment will consist of two components: principal and interest.  Initially each payment will be primarily applied against interest, but as the loan balance is paid down an increasingly large component will go towards principal. 

AMORTIZATION SCHEDULE:
Chart which indicates payments on an amortized loan which indicates the allocation of each payment towards principal and interest. 

ANNUAL PERCENTAGE RATE (A.P.R.):
A rate designed to allow for the comparison of one type of loan to another. The annual cost of borrowing under a given form of loan (includes in the calculation compounded interest, cost of borrowing etc.).

ASSUMABLE MORTGAGE:
A mortgage that can be taken over ("assumed") by the buyer when a home is sold. If interest rates have risen, an assumable mortgage at a low rate may prove a selling point for the property.

BALLOON PAYMENT:
The single, large payment which pays out the balance due on a balloon mortgage.

BIWEEKLY LOAN OR MORTGAGE:
A loan which features payments equaling one half of the usual monthly payment made every two weeks (to total 26 in a year), thus substantially reducing the life of the mortgage and the interest payable over the life of the mortgage.

BLANKET MORTGAGE:
Where one loan is secured against more than one parcel of land.

BRIDGE FINANCING:
Also known as a "swing loan", a loan used to fill a gap in financing, often between the purchase of a new home and the sale of the old one. If the purchase closes before the sale, the home owner needs to borrow enough money to pay for the new house for the period of time before the equity in his old house comes available as a result of the completion of the sale.

BUY DOWN (ACCOUNT OR MORTGAGE):
The payment of extra money on a loan now so as to reduce the interest rate over a given period or over the life of the loan. This extra payment may be made by the borrower, by the lender (as an incentive to the borrower to borrow from the lender) or by the vendor/builder (as an incentive to the borrower to buy a certain property).

CAP:
A limit. In variable rate mortgages, a limit as to how high periodic payments may go or how much the interest may change within a given time period or over the life of the mortgage.

CASH RESERVE:
An amount of money that the purchaser of a property still has after the transaction closes. Some lenders require a certain level of cash reserve (equal to two payments) before granting a mortgage.

CASH-OUT REFINANCE:
When an owner renegotiates or negotiates a new mortgage and the proceeds of the new financing exceed the money required to pay out the old mortgage and any other costs, liens or expenses, leaving money for the borrower.

CEILING:
The limit over which the interest rate on a variable rate mortgage may not rise over the life of the loan.

CHANGE FREQUENCY:
Term describing the period of time between changes in the interest rate and/or payments of a variable rate (adjustable rate) mortgage or loan (i.e. one week, one month etc.).

COLLATERAL:
Property (real or personal) which is pledged to secure a loan or mortgage. If the debt is not paid, the lender has the right to sell the collateral to recoup the outstanding principal and interest on the loan.

CONSTRUCTION LOAN:
A structured, short-term loan to a builder or developer to allow for the development of land. Funds are advanced at certain stages of the development project to pay for specific expenses, fees or costs.

CREATIVE FINANCING:
An arrangement for the financing of the purchase of a property which is outside the normal practice of residential financing.

DEBT COVERAGE RATIO (DCR):
A comparison of the net income of a property with the cost of payments (principal and interest) on the mortgage on the property, used to assess the ability of the property to generate enough income to pay for itself.

DEBT EQUITY RATIO:
A comparison of the amount owing on a property with the equity (value of property minus amount owing).

DEBT FINANCING:
Paying for the purchase of a property with credit.

DEBT RATIO:
Also known as Debt-to-Income ratio. A comparison of the total monthly payments of all of the borrower's debts (including the mortgage) with the gross monthly income of the borrower, used to assess borrower's ability to pay mortgage.

DEPRECIATION:
The cost of income producing property is recovered through depreciation.  Depreciation is a non-cash accounting entry which may produce yearly tax deductions.  

According to the Internal Revenue Service, there are three basic factors that determine how much depreciation you can deduct. They are:

• your basis in the property,
• the recovery period for the property, and
• the depreciation method used.
  

You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense.   Depreciation must be calculated in accordance with the rules stipulated in IRS Publication 527. 

You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces the yearly income tax paid by the investor by reducing the reportable net income.  However, depreciation also increases the capital gains tax paid by the investor upon selling the property by reducing the basis for figuring gain or loss on a the sale or exchange.

 EFFECTIVE RATE:
The actual rate (or interest or return) once all factors are accounted for (factors include compounding of interest or costs of earning the return).

EQUITY:
The difference between the market value of a property and the outstanding mortgage balance.  If the property were to be sold, this is the amount in dollars that the seller would be left with after paying the mortgage.  

ESCROW COLLECTIONS:
Moneys taken in by the agent and set aside for future payments as required by the contract (i.e., in a mortgage situation, for taxes, insurance, etc. on the property). Also known as "escrow deposits", "impounds" or "reserves".

ESCROW DEPOSIT:
Similar to "escrow collections", the deposit of funds for the purpose of future payments required under the contract.

ESCROW DISBURSEMENTS:
The payment out of escrow funds of taxes, insurance, etc. as required by the contract. Also known as "escrow payments".

ESCROW REIMBURSEMENT:
The return to the borrower of left over funds held in escrow once the debt has been paid out.