Key Terms Associated To Mortgage Loans


We all more or less are aware of general concept of mortgage loans, however when opting for it we should have knowledge of some very basic but important terms. These terms can prove very critical as the amount and time involved in mortgage loan is huge. Some of them are described here.

Adjustment Frequency

This is the frequency which is liable for fluctuations in interest rates. Adjustment frequency differs according to the adjustable rate mortgages. Ritually it is adjusted once a year, but frequency can also alter monthly and sometimes once a five year in extreme cases. From a borrower's point of view, financial risk is as lower as the rate adjustment frequency. However lenders usually set a higher initial rate of interest for the borrower to pay in order to reimburse for lesser rate of interest in future. It is done usually before the first reset date of adjusting frequency.

Adjustment Index

Adjustment Index is a predefined mathematical formula which helps in ascertaining certain value, for a given set of data keeping in mind market fluctuations. In Consumer financing market, adjustment index is commonly used to set the adjustment rate mortgages. The sole purpose of using this index is to arrive at an appropriate adjustment rate keeping in sink with the market factors and variations.

Margin

Margin in general is referred to the gap between the borrowed money and the cost of security/services thus bought. In mortgage loan context, margin is the gap between the interest rate as adjusted by adjustment index and the interest rate as set by adjustment mortgage loan. This is the profit made by the lender. However buying with borrowed money involves a greater risk as the interest paid for the borrowed money is high. However borrower should be aware of the margin, as it is the profit made by the lender out of his (borrower's) pocket. The interest rate on adjustable rate mortgage can be calculated by adding adjustment-index rate (e.g. Treasury Index) and percentage of the margin. This means that if the Treasury Index is 5 percent and the interest rate on the adjustment rate mortgage is 7 percent, the margin would be 2 percent.

Cap

This is the highest limit of an adjustable rate mortgage can up lift in a given time period, in other words this is the highest rate lender can receive on a floating/flexible mortgage loan during a specified time period. The financial institutions normally set the cap at the time of granting the loan. Customers who opt for a flexible mortgage loan, typically experience fluctuations in their monthly interest rates, however capping act as a safeguard in varying situation where interest rate might go up dramatically.

Interest Rate Ceiling

This is the maximum rate of interest any financial institution can charge from a customer on adjustable rate mortgage as per the agreed contractual terms. This may sound quite similar to capping, however the only difference is that capping determines the maximum change permitted in an initial interest rate, where as ceiling can be termed as maximum interest rate for lifetime.

There are many more terms which are substantially important for borrower to understand before signing the loan documents however above terms are very generic in every mortgage loan but ironically, are mistaken in understanding most of the time.