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Loan Glossary

Adjustable Rate

An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

Amortization

A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Amortization Term

The amount of time required to amortize the loan. The amortization term is expressed as a number of months. For example, for a 15-year fixed-rate mortgage, the amortization term is 180 months.

APR

When you borrow money, every lender is required by law to quote this rate. Always insist on being told the APR, it's the best way of comparing like with like. If a lender can't tell you, find another one - they're probably a bit seedy or even a loan shark!

The APR was introduced as part of the Consumer Credit Act of 1974.

The headline quoted rate on a mortgage or a credit card states the rate of interest you pay per month or per year, but it's the APR figures (usually shown in brackets) which calculates the total amount of interest that will be paid over the whole term of the loan. The APR should also take into account any charges which the borrower has to pay. So, if you see a 'too good to be true' mortgage offer, where the loan is fixed at a surprisingly low rate for 1 year, bear in mind, after the fixed period has ended, the interest rate will almost certainly revert to the current variable mortgage rate for the remainder of the loan, which may be another 24 years!

The net result is the APR will be much higher than 3%.

Application Fee

Fees that are paid upon application.

Bridging Loan

This is a short term loan. It is often used by purchasers of a property who need funds for a limited period of time. e.g. until they sell their existing home. Major banks and building societies can offer bridging finance, but consider all the risks before you opt for it. Consider the risks. For example, if you effectively take on a second home loan and you fail to sell your first property, can you afford to shoulder the burden ?

Bankrupt

A corporation, firm or individual is described as being 'bankrupt' when they are relieved from paying all debts once their assets have been surrendered to an appointed third party. Bankruptcy proceedings are managed via the court system, with the appointed third party designated by the court in charge of the proceedings, in accordance with the Insolvency Act. A supervisor is appointed to receive a bankrupt person's earnings. The bankrupt is permitted to receive an allowance on which to live with the balance being reserved for the benefit of his or her creditors.

A bankrupt person is not permitted to hold a bank account or apply for credit in excess of £250 without the court's permission

Cap

The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage. See Adjustable Rate Mortgages for a complete guide.

Cash Out

Receiving money back when refinancing your present mortgage.

CCJ

County Court Judgement (CCJ)judgements are given by the county court as a result of a non-payment of a debt. This can be for quite a small amount but can have serious implications for your credit record and your ability to obtain credit in the future. In fact, once you have a CCJ it will appear on every credit search for the next seven years. However, if the debt is settled in full within 30 days of the date of the judgement it will not appear in the credit register. In the event of a payment after that date the judgement will appear in the register but will be shown as being satisfied. If a judgement has not been settled and is outstanding this is likely to lead to a lender's refusing a mortgage or loan application.

Ceiling

The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.

Clear Title

A title that is free of liens or legal questions as to ownership of the property.

Closing

The time and place at which all documents for your loan are signed, dated and notarized.

Closing Costs

Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney's fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Collateral

An asset that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

Credit Limit

The maximum amount that you can borrow under a home equity plan.

Credit History

A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit Report

These days having a less than perfect credit record or an irregular income should not stop you from taking out a mortgage or getting access to other borrowings. Recent research reveals that about a quarter of the population would be refused credit, showing that it is not a problem confined to the minority.

If you have had credit problems in the past don't immediately rule out the high street lenders. They say they take each case individually and would consider someone with a County Court Judgment (CCJ) for non-payment of debt, if it was for a small amount and had been cleared some time ago. But if you are refused credit, lenders don't have to tell you why.

Both a CCJ and a bankruptcy order are held on a person's credit record for six years. CCJ's can be withdrawn from your file if they are cleared within one month. It is worth knowing that you could unaware that you have a CCJ on your credit record, perhaps caused by a bill being unpaid if it was sent to an old address.

When you apply for credit, lenders check your credit record, called credit scoring, with specialist credit agencies that collect information from the courts, lenders and the electoral roll.

If you feel you there has been an error made in your credit scoring you can obtain your credit file from the main credit agencies Experian and Equifax for a cheque for £2. They will send you your details covering the past six years within seven days.

If you have a dispute about an item you can call or write to ask for an investigation and, if proved correct, to have your record altered.

Beware of so-called credit repair companies, especially if they try to offer you loans at high rates of interest. If that happens steer well clear.

Debt

Amount owed to another.

Debt Consolidation

Replacing a number of existing loans with a single loan from a new lender.

This can result in a reduction in your monthly payments by spreading the larger loan over a longer period and possibly, by reducing the overall interest rate.

Debt Service

The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Debt-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income.

Deed of Trust

Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.

Default

Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Down Payment

The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer's own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Early redemption charge

This is a charge made by your mortgage lender which is payable on certain types of loan - usually discounted or fixed interest rate loans. The charge is only applied if the loan is redeemed or part-redeemed within the specified early redemption charge period.

This is the quid-pro-quo of benefiting from the certainty conferred by fixed rates or the cheaper mortgage offered by discounted rates.

Some lenders lock you in to a three or six month redemption charge - you've been warned, if someone is offering you an incredibly good interest rate below the rate prevailing on variable rate mortgages, the chances are they want something - your loyalty, and that could mean it'll cost you if you decide to move lender in future.

Effective Interest Rate

The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.

Encumbrance

A claim against a property by another party which usually affects the ability to transfer ownership of the property.

First Mortgage

A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

Fixed Rate

An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.

Guarantor

Person who agrees to guarantee that a loan will be paid. The guarantor is therefore fully liable for the repayment of the borrowed amount should the borrower default.

Grace Period

A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.

Gross Income

For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Interest Rate

The periodic charge, expressed as a percentage, for use of credit.

Lender

The bank, mortgage company, or mortgage broker offering the loan.

Lien

The right to take and hold or sell the property of a debtor as a security or payment for a debt.

Loan - Secured

A secured loan is one whereby the equity in your property is used as security against the loan not being repaid. If you default, you may be forced to sell your home and pay off the loan with the equity.

Loan - Unsecured

With an unsecured loan, the loan is not secured against a property, either because you are not a homeowner or because your credit score is such that no security is required. Unsecured loans, because they carry a higher risk of default, often attract a higher interest rate.

Mortgage

A legal document that pledges to the lender as security for payment of a debt.

Note

A written agreement containing a promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.

Principal

The original amount of the loan, the capital.

Quotation

A detailed document itemising costs, fees etc. which will be incurred in taking out the specified loan.

Rate

The annual rate of interest on a loan, expressed as a percentage of 100.

Title

The written evidence that proves the right of ownership of a specific piece of property.

Title Search

An investigation into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.

Top-up loan

Form of second mortgage normally used to provide an overall loan in excess of the loan to value ratio allowed by the primary lender. Top up loans will invariably be charged at a higher rate than the first mortgage and will frequently carry onerous redemption charges.

Underwriting

The process of verifying data and approving a loan.

Valuation

A brief inspection of a property for mortgage purposes confirming the suitability of a property to secure money against and its value. inspection carried out for the benefit of the mortgage lender to ascertain if a property forms good security for a loan. Whilst the borrower may be given a copy of the valuation this is only a limited form of inspection and should not be relied upon on when deciding whether to purchase a property. Purchasers should be advised to obtain either a House or Flat Buyer's report or a full structural survey before proceeding with a purchase

Variable Rate

An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.