Personal Banking

Mortgage and Construction Loans

Definition of Terms

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Adjustable-rate loan: A loan that allows the lender to make periodic adjustments in the interest rate according to fluctuating market conditions. Also referred to as a variable-rate loan.

Adjustable-rate mortgage (ARM): A mortgage carrying an interest rate that adjusts according to the movements of a given index. Adjustable-rate mortgages start with lower interest rates than fixed-rate mortgages, but may fluctuate over time.

Amortization: The gradual reduction of a loan or other obligation by periodic payments of principal or interest.

Annual Percentage Rate (APR): The true cost of credit on a yearly basis. Expressed as a percentage, the APR results from an equation that considers the amount financed, the finance charge, and the terms of the loan. The APR is usually expressed in terms of the effective annual simple interest rate.

Appraisal: The process by which a qualified professional evaluates property to determine the market value of the home that will be used for collateral.

Asset: Anything owned that has commercial or exchange value. Assets may consist of specific property or of claims against others, versus obligations due to others (liabilities).

Balloon Payment: The balance of payment due, paid in a lump sum, usually after 2 to 7 years of monthly payments.

Closing: The final purchase date on a mortgage loan.

Closing costs: Up-front fees paid to a financial institution to cover costs associated with a mortgage loan. Examples of these costs include credit report, appraisal, legal and loan work, and document recording costs.

Collateral note: A promissory note that pledges certain property to secure a loan.

Construction loan: A short-term loan, often unsecured, to a builder or developer to finance the costs of construction. The lender generally requires repayment from the proceeds of the borrower's permanent mortgage loan. The lender may make periodic payments to the borrower as the construction work progresses.

Conventional Mortgage: A mortgage that is neither guaranteed nor insured by a government agency. Most conventional mortgages are paid off in equal monthly installments over 15,25, or 30 years.

Deed: A written instrument, executed and delivered according to law, used to transfer title to property.

Down payment: Money contributed by the borrower.

Equal housing lender: A disclosure or symbol that notifies consumers that the financial institution does not discriminate against an applicant because of age, sex, marital status, religion, race, color, national origin, or receipt of income from public assistance programs, or the fact that the applicant has exercised any rights under the federal consumer credit laws.

Escrow: The holding of funds, documents, securities, or other property by an impartial third party for the other two participants in a business transaction. When the transaction is completed, the escrow agent releases the entrusted property.

First-time home buyer programs: In Iowa, mortgage loan programs designed for those who are purchasing their first home or for those who have not owned a home in the past three years. Applicant must meet eligibility requirements to qualify. Programs may very from state-to-state.

Fixed-rate loan: A loan that allows the borrower to "lock-in" their interest rate for the life of the contract, regardless of fluctuating market conditions.

Home equity line of credit: A variable-rate revolving line of credit secured by a home or residence.

Home equity loan: A fixed-rate term loan secured by a home or residence.

Joint Account: A bank relationship in the names of two or more parties. Joint accounts may carry rights of survivorship.

Legal lending limit: The maximum amount of money a bank can lend on an unsecured basis to a single borrower or a combination of financially related borrowers. The legal lending limit is established by law and is expressed as a percentage of the bank's capital and surplus.

Lien: A legal claim or attachment filed on record, against property as security for the payment of an obligation.

Line of credit: An expression of the maximum amount of credit a bank is willing to lend to a borrower.

Loan: A business contract in which a borrower agrees to pay interest for the use of the lender's funds.

Mortgage Loan: Real estate credit, usually extended on a long-term basis, with the mortgaged property as security.

Note: A written promise to pay a specific amount either on demand or at a future date.

Points: A one-time charge that equals 1% of the amount borrowed. Points are often purchased to lower the interest rate on the loan.

Pre-qualification: A program that allows a prospective borrower to receive pre-approval for the amount of credit that will be extended to them to purchase property.

Prime rate: A benchmark or guideline interest rate that a bank establishes from time to time and uses in calculating an appropriate rate for a particular loan contract.

Principal: (1) The sum of money stated in an account, a contract, or a financial instrument; for example, the amount of a loan or debt exclusive of interest. (2) The primary borrower on a loan or other obligation. (3) A person who appoints another party to act for him or her as agent. (4) The property of an estate. (5) The individual with primary ownership or management control of a business.

Promissory Note: A written promise committing the make to pay a certain sum of money to the payee, with or without interest, on demand or on a fixed or determinable future date.

Refinancing: (1) To retire existing loans or notes by changing their terms or by making new borrowing arrangements. (2) To retire existing securities by selling new issues.

Revolving credit: A line of credit that permits the borrower to withdraw funds or charge purchases up to a specified dollar limit. The outstanding balance may fluctuate at various times from zero up to the maximum amount. Also referred to as open-end credit.

Secured loan: A borrower's obligation that includes the pledging of some form of collateral to protect the lender in case of default.

Serviced locally: The financial institution maintains the loan servicing.

Servicing transferred: The financial institution sells the loan and the servicing to a third party.

Term: The length of the loan agreement.

Unsecured loan: Bank credit extended without collateral.

Variable-rate loan: A loan that allows the lender to make periodic adjustments in the interest rate according to fluctuating market conditions. Also referred to as an adjustable-rate loan.