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Mortgage Loan Amortizations

Mortgage Loan Amortizations Glossary

Adjustable-rate mortgage (ARM)
Adjustable-rate mortgages do not have a fixed interest rate. The rate changes during the life of the loan in line with movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index.

Amortizing loan
Monthly payments are large enough to pay the interest and reduce the principal on your mortgage.

Cap, interest rate
A limit on the amount your interest rate can increase. Interest caps come in two versions:

Periodic caps, which limit the interest rate increase from one adjustment period to the next and overall caps, which limit the interest-rate increase over the life of the loan. By law, virtually all ARMs must have an overall cap.

Cap, payment
A limit on how much the monthly payment may change, either each time the payment changes or during the life of the mortgage. Payment caps do not limit the amount of interest the lender is earning, so they may lead to negative amortization.

Equity
The difference between the fair market value of the home and the outstanding mortgage balance is known as equity.

Interest
The price paid for borrowing money, usually given in percentages and as an annual rate.

Negative amortization
Negative amortization occurs when the monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan.

Principal
A principal is the initial amount of money borrowed.

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