Important Questions and Answers about Savings, CD and Loan Terminology
Savings and CD Terminology
The percentage amount ordinarily advertised on interest-bearing deposit accounts (savings accounts, checking accounts and CDs). Truth in Savings regulations require this number be reported and it reflects the total interest to be received over a 365-day year, regardless of the bank's own method of compounding (daily, weekly, monthly, etc.). Therefore, the use of APY creates a level playing field through which to compare returns from bank accounts and CDs that may use differing compounding methodology.
One percentage point of one percent. The difference between 2.00% and 2.01% is one basis point. The difference between 2.00% and 2.02% is two basis points. The difference between 2.00% and 2.50% is fifty basis points.
The percentage return on a bond or CD based on its current market price and its original interest rate. A bond or CD for which you paid $1,000 and that pays you $60 annually would have a current yield of 6%. A bond or CD for which you paid $1,000 and that pays you $30 semi-annually with the $30 annual payments accruing interest so that it pays $31.80 in the second annual payment also has a current yield of 6%, but it has an APY of 6.18%.
The amount under face value paid for a security. A security trading at 99% of face value is said to be trading at a 1% discount under par. A security trading exactly at 100% of face value is trading at par value. A CD trading above the face or par value trades at a premium. Brokered CDs may trade at a discount or premium (and these are not recommended), but discounts or premiums on CDs are exceptionally rare.
The entity that issues a debt security and is obligated to pay interest and principal. Except with brokered CDs (not recommended), bank CDs are issued only by the issuer, its parent entity or an entity in the same corporate family. Especially with online banks, you need to know who the parent company is as that is the issuer of CDs (and bank under whose FDIC certificate savings accounts are held). It is important to know the issuer in order to avoid exceeding FDIC (or NCUA) insurance limits. For example, IGoBanking, BankPurely and GiftsforBanking.com are all trade names for a single issuer (Flushing Bank).
A hedging technique for reducing the impact of interest-rate risk by structuring a portfolio with different instruments that mature at different dates. CD laddering involves protecting from the impact of a dramatic move in interest rates by buying CDs with different maturities.
The ability to quickly convert an investment into cash. A savings or money market account that you can withdraw money from at any given moment without a penalty always offers the best liquidity. Other investments that allow quick conversion to cash, such as a No Penalty CD, can also offer excellent liquidity. CDs generally are less liquid than savings, but may offer a certain amount of liquidity if the bank allows withdrawal with payment of a reasonable early withdrawal penalty. Long-term bonds are generally considered less liquid (some bonds aren’t liquid at all). Real estate investments are perhaps the least liquid investment class.
The date on which the issuer of a security, such as a CD, is obligated to redeem the security (exchange the security for cash in the amount of face value plus accrued interest).
Loan Terminology
What is an Amortizing Loan?
A loan that is repaid in whole or in part through a series of regular installments of principal and interest, that are equal or nearly equal (as opposed to an interest-only loan).
What does Annual Percentage Rate (APR) mean?
A percentage rate that reflects the amount of interest earned or charged annually.
What is Appraised Value?
The dollar value for loan purposes assigned to a property by an appraiser.
What is a Balloon Payment?
A single payment on a mortgage or other loan - usually the final one for discharging the debt - that ordinarily pays off the principal balance and extinguishes the loan.
What is a Bridge Loan?
A temporary loan provided to a borrower when the net proceeds from a sale of a prior residence are not available for the purchase of a new home. It is intended that a bridge loan will be paid off with the net proceeds from the prior residence's sale.
What is Close of Escrow?
The meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands.
Who is a Co-Borrower?
Any individual who will assume responsibility on the loan, take a title interest in the property and intends to occupy the property as their primary residence.
Who is a Co-Signer?
Any individual who will assume responsibility on the loan, but who will not take a title interest in the property nor occupy the property.
What is a Deed of Trust?
A security instrument conveying title in trust to a third party covering a particular piece of property. It is used to secure payment of a mortgage, home equity loan, or other promissory note.
What is a Down Payment?
The difference between the purchase price and the loan amount that the borrower is responsible for paying at closing.
What Does Equity mean?
The difference between the fair market value of a property and the current indebtedness secured on the property.
What is Escrow?
A situation in which a third party, acting as the agent for the buyer
and the seller, carries out the instructions of both and assumes
the responsibilities of handling all the paperwork and disbursement
of funds at settlement or at closing.
What is Evidence of Insurance?
Written documentation from an insurance company that a homeowners’ policy can be written on a property in favor of a borrower. This documentation need not be an insurance policy, but is a commitment from the insurance company to provide a policy for a specific property at a specific time and premium amount.
What is a Final Settlement Statement (aka HUD1 Closing Statement)?
A financial disclosure giving an accounting of all funds received and disbursed at loan closing.
What is an Interest-Only Loan?
A non-amortizing loan in which the lender receives interest during the term of the loan and principal is repaid in a lump sum (or a balloon payment) at maturity.
What is an IRS 1098 Mortgage Interest Statement?
A statement provided by the lender to the borrower indicating the total amount of interest paid by the borrower for a given calendar year.
What is Joint Tenancy?
Joint ownership by two or more persons giving each tenant equal interest and equal rights in the property, including the right of survivorship.
What is Loan-to-Value (LTV) Ratio?
The ratio of the principal balance of a mortgage loan to the value of the securing property, as determined by lesser of the purchase price or appraised value.
What does Loan Underwriting mean?
A bank or lending institution’s analysis of risk and its decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors.
Who is a Mortgagee?
A lender or creditor who holds a mortgage or Deed of Trust.
Who is a Mortgagor?
A borrower who is obligated to pay on a mortgage or Deed of Trust.
What does Net Income mean?
The monthly salary paid to a borrower after deducting any federal and state payroll taxes.
What does Overall Debt to Income Ratio mean?
The ratio, expressed as a percentage, of a borrower's principal amortization and interest payment expenses, taxes and insurance and all recurring monthly debt (such as credit card payment, student loan, mortgage, and auto loan) to gross monthly income.
What are Preliminary Disclosures?
A group of disclosure forms required by federal law to be sent to a loan applicant include a Loan Estimate Disclosure and a Fair Lending Notice.
What is a Preliminary Title Report?
A title search by a title company prior to issuance of a title binder or a commitment to insure, required during the processing of a mortgage or home equity loan.
What is Prepaid Interest?
Mortgage interest that is paid from the date of the funding to the end of that calendar month.
What is the definition of Primary Residence?
A dwelling where one actually lives and is considered as the legal residence for income tax purposes.
What does Mortgage Principal mean?
The amount of debt, exclusive of interest, remaining on a loan.
What does Principal Amortization mean?
Payments allocated to principal by periodic amounts reducing and ultimately paying off the principal balance of a loan at the end of a fixed period, after accounting for interest on the outstanding balance.
What is Principal and Interest to Income Ratio?
The ratio, expressed as a percentage, of a borrower's principal amortization and interest payment expenses to gross monthly household income.
What are Purchase Transaction Documents?
The aggregate term for independent third party documentation pertaining to the subject property. This includes property appraisal, termite inspection report, preliminary title report, real estate transfer disclosure, roofing, geological, foundation, septic inspections, and overall home inspection.
What is a Refinancing?
The process of paying off an existing loan and establishing a new loan.
What are Reserves?
Liquid or near liquid assets that are available to a borrower after a mortgage closes. Reserves are measured by the number of months of the qualifying payment amount for the subject mortgage (based on principal amortization and interest) that a borrower could pay if they were to lose access to income.
What does Servicing mean?
The collection of payments and management of operational procedures related to a mortgage loan.
What is a Title?
The evidence of the right to or ownership in property.
What is Title Insurance?
A policy, usually issued by a title Insurance company, insuring a homebuyer and the lender against errors in the title search.
Who is a Trustee ?
One who holds legal title to a property for the benefit of another, or for the purpose of securing performance of an obligation.
A loan that is repaid in whole or in part through a series of regular installments of principal and interest, that are equal or nearly equal (as opposed to an interest-only loan).
A percentage rate that reflects the amount of interest earned or charged annually.
The dollar value for loan purposes assigned to a property by an appraiser.
A single payment on a mortgage or other loan - usually the final one for discharging the debt - that ordinarily pays off the principal balance and extinguishes the loan.
A temporary loan provided to a borrower when the net proceeds from a sale of a prior residence are not available for the purchase of a new home. It is intended that a bridge loan will be paid off with the net proceeds from the prior residence's sale.
The meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands.
Any individual who will assume responsibility on the loan, take a title interest in the property and intends to occupy the property as their primary residence.
Any individual who will assume responsibility on the loan, but who will not take a title interest in the property nor occupy the property.
A security instrument conveying title in trust to a third party covering a particular piece of property. It is used to secure payment of a mortgage, home equity loan, or other promissory note.
The difference between the purchase price and the loan amount that the borrower is responsible for paying at closing.
The difference between the fair market value of a property and the current indebtedness secured on the property.
A situation in which a third party, acting as the agent for the buyer and the seller, carries out the instructions of both and assumes the responsibilities of handling all the paperwork and disbursement of funds at settlement or at closing.
Written documentation from an insurance company that a homeowners’ policy can be written on a property in favor of a borrower. This documentation need not be an insurance policy, but is a commitment from the insurance company to provide a policy for a specific property at a specific time and premium amount.
A financial disclosure giving an accounting of all funds received and disbursed at loan closing.
A non-amortizing loan in which the lender receives interest during the term of the loan and principal is repaid in a lump sum (or a balloon payment) at maturity.
A statement provided by the lender to the borrower indicating the total amount of interest paid by the borrower for a given calendar year.
Joint ownership by two or more persons giving each tenant equal interest and equal rights in the property, including the right of survivorship.
The ratio of the principal balance of a mortgage loan to the value of the securing property, as determined by lesser of the purchase price or appraised value.
A bank or lending institution’s analysis of risk and its decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors.
A lender or creditor who holds a mortgage or Deed of Trust.
A borrower who is obligated to pay on a mortgage or Deed of Trust.
The monthly salary paid to a borrower after deducting any federal and state payroll taxes.
The ratio, expressed as a percentage, of a borrower's principal amortization and interest payment expenses, taxes and insurance and all recurring monthly debt (such as credit card payment, student loan, mortgage, and auto loan) to gross monthly income.
A group of disclosure forms required by federal law to be sent to a loan applicant include a Loan Estimate Disclosure and a Fair Lending Notice.
A title search by a title company prior to issuance of a title binder or a commitment to insure, required during the processing of a mortgage or home equity loan.
Mortgage interest that is paid from the date of the funding to the end of that calendar month.
A dwelling where one actually lives and is considered as the legal residence for income tax purposes.
The amount of debt, exclusive of interest, remaining on a loan.
Payments allocated to principal by periodic amounts reducing and ultimately paying off the principal balance of a loan at the end of a fixed period, after accounting for interest on the outstanding balance.
The ratio, expressed as a percentage, of a borrower's principal amortization and interest payment expenses to gross monthly household income.
The aggregate term for independent third party documentation pertaining to the subject property. This includes property appraisal, termite inspection report, preliminary title report, real estate transfer disclosure, roofing, geological, foundation, septic inspections, and overall home inspection.
The process of paying off an existing loan and establishing a new loan.
Liquid or near liquid assets that are available to a borrower after a mortgage closes. Reserves are measured by the number of months of the qualifying payment amount for the subject mortgage (based on principal amortization and interest) that a borrower could pay if they were to lose access to income.
The collection of payments and management of operational procedures related to a mortgage loan.
The evidence of the right to or ownership in property.
A policy, usually issued by a title Insurance company, insuring a homebuyer and the lender against errors in the title search.
One who holds legal title to a property for the benefit of another, or for the purpose of securing performance of an obligation.