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In the
current economic climate, we hear terms such as subprime,
Fannie Mae, Freddie Mac, ARM, recession and depression.
Do you know what these terms mean to your current
financial situation? This month’s column is designed to
help you understand some of the financial terms you may
need to know as you navigate the financial waters.
Adjustable Rate Mortgage (ARM) Unlike a
conventional mortgage with a fixed interest rate that
remains the same throughout the life of the loan, an
adjustable-rate mortgage changes periodically and
payments may go up or down accordingly. The borrower may
start out with a low interest rate, but as the interest
rate rises, so does your payment.
Annual Percentage Rate (APR) The yearly cost of a
mortgage, including interest, mortgage insurance, and
the origination fee (points), expressed as a percentage.
Annual Percentage Yield (APY) The rate of return
on an investment for a one-year period.
Average Daily Balance A method for calculating
interest in which the balance owed each day by a
customer is divided by the number of days.
Bear An investor who believes the stock market
will decline.
Bond Bonds are debt and are issued for a period
of more than one year. The U.S. government, local
governments, water districts, companies and many other
types of institutions sell bonds. When an investor buys
bonds, he or she is lending money. The seller of the
bond agrees to repay the principal amount of the loan at
a specified time, although some bond types may pay off
prior to maturity.
Bull An investor who believes the stock market
will rise.
Consumer Price Index (CPI) Measures the prices of
consumer goods and services and is a measure of the pace
of U.S. inflation. The U.S. Department of Labor
publishes the CPI every month.
Conventional Fixed Mortgage This type of
government-sponsored mortgage meets the funding criteria
of Fannie Mae and Freddie Mac.
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Credit Scoring A statistical technique that
combines several financial characteristics to form a
single numerical score to represent a customer's
creditworthiness.
Depression A period during which business
activity drops significantly marked by high unemployment
rates and deflation.
Fannie Mae (Federal
National Mortgage Association) Unlike Freddie Mac,
Fannie Mae is a publicly traded company, created in
1938, to expand the flow of mortgage money by creating a
secondary mortgage market to provide affordable home
ownership to low, moderate, and middle-income Americans.
Freddie Mac (Federal
Home Loan Mortgage Corp) A stockholder-owned
government-sponsored enterprise chartered by Congress in
1970 to keep money flowing to mortgage lenders in
support of homeownership and rental housing for middle
income Americans.
FHA Loan A
mortgage issued by federally qualified lenders and
insured by the Federal Housing Administration (FHA) that
is popular with first-time home buyers. It allows low to
moderate income borrowers to borrow up to 97% of the
value of the home.
Five Cs of Credit Five characteristics that are used to form a judgment
about a customer's creditworthiness: character,
capacity, capital, collateral and conditions.
Prepayment penalty
The fee a borrower pays a lender when the borrower
repays a loan before its scheduled time of maturity.
Most loans do not include such provisions.
Recession An
extended decline in general business activity, a decline
in the gross national product for two consecutive
quarters.
Subprime Lending
Practice of making loans to borrowers who do not qualify
for the best market interest rates because of their
deficient credit history.
While we may be
navigating some rough financial waters now, the sky is
not falling. However, this would be a good time to talk
to your community banker to make sure your financial
lifeboat is sound.
CONSUMER TIPS is provided as a public
service by the Missouri Independent Bankers Association
AND
Community Bank of the Ozarks
P.O. Box 43
Sunrise Beach, MO 65079
(573) 374-5245
1-800-927-4314
www.cbobanker.com
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