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Mortgage and Real Estate Glossary ~ I

Impound account -- Escrow Account

An account used to pay your hazard insurance, mortgage insurance and property taxes. An impound account is set up by the lender for you to prepay certain recurring costs at closing, such as your first six months of property taxes, your first two months of hazard insurance, and your first two months of mortgage insurance, if required. From then on, you pay these bills from this account. Some lenders let you waive the impound account, but may tack on additional points to your closing costs if you choose to not have one.
See: Closing costs

Income property

Renting out a home that is not your primary residence is one way to use property to make money. An income property, like an apartment building with more than four living units, is normally appraised, mortgaged and taxed differently than a primary, owner-occupied residence.

Index

An economic indicator that lenders use to set an adjustable rate mortgage's (ARM) interest rate. Each ARM is tied to a specific index. Since some indices move up and down faster than others, it is wise to find out which index is connected to your ARM. Three common indices used by lenders are:
(1) Certificate of deposits (CD), which go up like molasses, but shoot down quickly
(2) Treasury bills, an index that reacts quickly to market changes based on the average interest rate that the government pays on its debt
(3) Cost of funds index (COFI), a stable index based on the average interest rate that banks in certain states pay their customers. The 11th District COFI, for example, covers banks in California, Arizona and Nevada
See: Adjustable rate mortgage, Margin

Inflation

A decrease in the value of money. Inflation is a measure of the increase in the price of goods. Inflation generally affects your buying power - If you buy 10 ice cream cones with $10 one day, and inflation rockets up 10% the next day, you'll only be able to buy 9 ice cream cones with your $10. Inflation usually causes interest rates to rise. This is when it pays to have a fixed rate loan, rather than an adjustable rate loan since the interest rate doesn't increase to match the market rates.

Inflation can also affect property values: if your home is worth $100,000 and inflation goes up 10%, your home is now worth $110,000. An appraiser, though, usually adjusts their calculations to account for inflation when figuring out the market value of a property. Also, there are many factors that work together to influence property values that may offset inflation, such as supply and demand and a neighborhood's condition. Inflation levels in the U.S. are stable and fluctuate between 3% and 4%.

Initial interest rate

The initial interest rate on an ARM, sometimes called a teaser rate, is fixed for a certain period then adjusts to reflect overall market rates. The lender starts you off with a very low initial rate, planning that interest rates will rise in the future and adjust to market rates. Fixed rate loans, on the other hand always have the same interest rate for the life a loan, and the rate is usually higher than an ARM's initial interest rate.
See: Adjustment date

Installment

You usually pay off a mortgage in monthly or biweekly installments. If you have an escrow or impound account, your installment can be broken down into four parts, often referred to as PITI: loan principal, loan interest, property taxes and hazard insurance. So, every month, lenders collect one-twelfth of your annual property taxes and hazard insurance to place into the account. So, when these bills become due, the lender can readily pay them off.
See: Amortization

Installment sales contract

Installment sales contracts are a creative way for buyers to purchase a home without having to qualify for a loan or to pay closing costs. The contract is made between the buyer and seller with the lender's approval.

Here is how it works:
(1) the seller holds onto the existing mortgage
(2) the seller names the property's selling price
(3) the seller offers the buyer a loan at a higher interest rate than the existing mortgage
(4) the buyer pays the seller a fixed monthly amount
(5) the seller uses part of this money towards the existing loan and then pockets the difference
(6) the seller hands over the contract on the home when the buyer is paid up.

The buyer can sell or refinance the property, even though the seller holds legal title (ownership) of the property. This arrangement is commonly called a contract of sale.

Interest/Interest rate

Interest takes into account the lender's risk and how much it costs the lender to get the money for a loan. The more risk the lender takes, the higher the interest rate they charge you. You pay a small portion of the interest that you owe in each monthly loan payment.

The interest rate on a fixed rate loan depends on the going market rate and how many discount points that you pay up-front. An adjustable rate loan's interest rate is made up of the index, which is an economic indicator of overall interest rates, and the lender's margin.
See: Amortization , Annual Percentage Rate, Effective rate,Index

Interest rate cap

The limit on how much the interest rate on an adjustable rate mortgage (ARM) can go up or down. Most ARMs have two types of interest rate caps:
(1) lifetime caps, which are required by law, that limit the increase and decrease of a rate over the full course of a loan. A 6% lifetime cap, for example, means the rate cannot go beyond 6 percentage points over or under the initial rate
(2) periodic caps, which limit the rate change from one adjustment period to the next, even if the market interest rates significantly rise or fall during this time. A lifetime cap is also referred to as aceiling or floor.
See: Cap

Introductory rate

An adjustable rate mortgage's (ARM) starting interest rate, which stays fixed for a certain time then adjusts to reflect overall market interest rates.
See: Adjustable rate mortgage

Investment property

Investing in real estate can be extremely profitable venture- it is considered a long-term investment and the way to make money is to have equity, which is the money that you keep after the mortgage is paid off. The three main ways to build equity are:
(1) your down payment when you purchase
(2) paying off the loan's principal, which may take several years since your first years' payments go primarily towards the interest
(3) the increase in the home's value when the property appreciates.

The new capital gains tax also creates an added incentive to invest in a property. For example, if you are single, widowed or divorced, and your home was your primary residence for 2 of the last 5 years before you decide to sell, you can pocket up to $250,000 tax-free. If you're married, you can profit $500,000 without paying any tax. (always consult your tax accountant)
See: Capital gains tax

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