Impounds are payments made in advance for homeowner's insurance premiums and real estate taxes. A homebuyer makes these payments to an escrow account at loan closing, and periodically replenishes the account. An escrow agent pays the local tax authority and insurer from this account. Local lending requirements on funding the escrow account vary.
An index rate is a widely used interest rate that lenders use to set the interest rate on loans and credit cards. For residential mortgages, 10-year U.S. Treasury securities are often used for 30-year fixed-rate loans (on average, most homeowners live in their homes for a period of time closer to 10 years than 30 years). For ARM loans, two common indexes are the Eleventh District Cost of Funds Index (COFI), published by the San Francisco-based district office of the Federal Home Loan Bank, and the London Interbank Offered Rate (LIBOR), which is the rate most international banks are charging each other for large loans.
A process of pricing loans that involves setting the interest rate to a base rate, usually a widely quoted market rate such as the yield on U.S. Treasury bills, LIBOR or the U.S. prime rate. Indexing allows a lender and borrower to share the risk of changes in the base rate. The base rate is reset periodically; often on a specific date every year or other interval. The amount added to the base rate is called the margin, or spread.
Initial interest rate
For adjustable rate mortgages (ARMs), the starting interest rate on an adjustable rate mortgage loan (ARM), which is often below market ARM rates. For HECMs, this is the interest rate that is first charged on the loan balance beginning at closing. It equals the one-year rate for U.S. Treasury Securities, plus a margin.
For borrowers: Interest rate is the cost of borrowing money calculated as a yearly percentage. Your credit rating, the length of your loan term, and the current inflation rate may affect your loan's interest rate.
For investors and savings account holders: the interest rate is the rate earned on an investment as a yearly percentage. The simple interest rate is interest paid or received divided by loan or deposit. For example, $100 in annual interest on a $1,000 loan or deposit is a simple interest rate of 10%. Compounded interest rate is determined by the frequency of interest payments during the loan or deposit term. For example, a 10% loan or deposit that is compounded quarterly equals a compounded rate of 10.38%. If compounded daily, the compounded interest rate increases to 10.52%. (For CD investors, a compounded interest rate is called an annual percentage yield.) An annual percentage rate (APR) is the actual cost of borrowing. It includes fees and points you pay for a loan in the calculation. As a result, annual interest rates for loans are higher than simple interest rates.
Interest rate adjustment
This is the amount of change that the base interest rate on an adjustable rate mortgage (ARM) is subject to. The interest rate is usually adjusted once a year to reflect changes in the base rate. The interest rate on an ARM is the sum of a base, or index, rate and a spread to reflect the borrower's credit risk.
Mortgage payments that include only interest. These are used to provide homebuyers with lower monthly payments during the first years of their loan term. No loan amortization occurs and, thus, the homeowner does not accrue any equity unless the home's value increases.
A process that allows interest earned in one account to be transferred to another account.