Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage (ARM) is a type of loan where the interest rate may go up or down. Many ARMs start at a lower interest rate than fixed rate mortgages. This initial rate may stay the same for months, one year, or a few years. When this introductory period is over, your interest rate will change and the amount of your payment is likely to go up. Part of the interest rate you pay will be tied to a broader measure of interest rates, called an index. Your payment goes up when this index of interest rates moves higher. When interest rates decline, sometimes your payment may go down, but that is not true for all ARMs. Some ARMs set a cap on how high your rate can go and some may limit how low the rate can go. Learn more about .
Amortization means paying off a loan with regular payments, so that the amount you owe goes down with each payment.
Negative amortization means that even when you pay, the amount you owe will still go up because you are not paying enough to cover the interest. Your lender may offer you the choice to make a minimum payment that doesn’t cover the interest you owe. The unpaid interest gets added to the amount you borrowed, and the amount you owe increases.
Usually, after a period of time, you will have to start making payments to cover principal and interest. These payments will be higher. A negative amortization loan can be risky because you can end up owing more on your mortgage than your home is worth. That makes it harder to sell your house because the sales price won’t be enough to pay what you owe. This can put you at risk of foreclosure if you run into trouble making your mortgage payments.
Automatic payments allow you to set up recurring mortgage payments through your bank. Automatic payments can be a convenient way to make sure that you make your payments on time.
A balloon payment is a larger-than-usual one-time payment at the end of the loan term. If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could owe a big amount at the end of the loan term. A mortgage with a balloon payment can be risky because you owe a larger payment at the end of the loan. If the value of your property falls, or if your financial condition declines, you might not be able to sell or refinance in time before the final balloon payment comes due.
In a bi-weekly payment plan, the mortgage servicer is collecting half of your monthly payment every two weeks, resulting in 26 payments over the course of the year (totaling one extra monthly payment per year). By making additional payments and applying your payments to the principal, you may be able to pay off your loan early. Before choosing a bi-weekly payment, be sure to review your loan terms to see if you will be subject to a prepayment penalty if you do so. Check if your servicer charges any fees for a bi-weekly payment plan. You may be able to accomplish the same goal without the fee by making an extra monthly mortgage payment each year.
Deed-in-lieu of foreclosure
A deed-in-lieu of foreclosure is an arrangement where you voluntarily turn over ownership of your home to the lender to avoid the foreclosure process. A deed-in-lieu of foreclosure may help you avoid being personally liable for any amount remaining on the mortgage. If you live in a state in which you are responsible for any deficiency, which is a difference between the value of your property and the amount you still owe on your mortgage loan, you will want to ask your lender to waive the deficiency. If the lender waives the deficiency, get the waiver in writing and keep it for your records. A deed-in-lieu of foreclosure is one type of loss mitigation.
Delinquent is another term for being late on your payments. Your loan can become delinquent when you miss a payment or don’t make a full payment by the due date. After you are delinquent for a certain period of time, a lender or servicer may begin the foreclosure process. The amount of time can vary by state.
An escrow account is an account set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowners insurance. The money that goes into the account comes from a portion of your monthly mortgage payment. An escrow account helps you pay these expenses because you send money through your lender or servicer, every month, instead of having to pay a big bill once or twice a year. An escrow account is sometimes called an impound account.
Not all mortgages have an escrow account. If your mortgage loan does not have an escrow account, then you pay your property taxes and homeowners insurance directly.
Federal Housing Administration (FHA) loan
FHA loans are loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA), a government agency. The FHA doesn’t lend the money directly to borrowers, private lenders do that. FHA loans are different from conventional loans in a few ways:
- FHA loans allow for down payments as low as 3.5 percent of the total loan amount.
- They allow lower credit scores than most conventional loans.
- They have a maximum loan amount that varies by county.
A fixed-rate mortgage is a type of loan where the interest rate is set when you take out the loan and it will not change.
Forbearance is when your servicer allows you temporarily to pay your mortgage at a lower rate or temporarily to stop paying your mortgage. Your servicer may grant you forbearance if, for example, you recently lost your job, suffered from a disaster, or from an illness or injury that increased your health care costs. Forbearance is a type of loss mitigation.
Your servicer may require force-placed insurance when you do not have your own insurance policy or if your own policy doesn’t meet your servicer’s requirements. Force-placed insurance usually protects only the lender, not you. The servicer will charge you for the insurance. Force-placed insurance is usually more expensive than finding an insurance policy yourself.
Foreclosure is when the lender takes back property when the homeowner fails to make payments on a mortgage. Foreclosure processes differ by state.
Typically, if you fall a few months behind on your mortgage payments, the foreclosure process may begin (although the process can begin earlier or later). Don’t wait for the foreclosure process to begin. Reach out for help as soon as you think you might have trouble paying your mortgage.
The foreclosure process generally may proceed in one of these ways depending on your state:
- Judicial foreclosure. This requires that the process go through the court system where the borrower can raise defenses.
- Non-judicial foreclosure. This is done without filing a court action and is carried out by a series of steps, including required written notices under a “power of sale” clause in the mortgage or deed of trust.
Homeowner’s insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. Standard homeowner’s insurance doesn’t cover damage from earthquakes or floods, but it may be possible to add this coverage. Homeowner's insurance is also sometimes referred to as "hazard insurance." Many homeowners pay for their homeowner’s insurance through escrow as part of their monthly mortgage payment.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is a line of credit that allows you to borrow against your home equity. Equity is the amount your property is currently worth, minus the amount of any mortgage on your property. Unlike a home equity loan, HELOCs usually have adjustable interest rates. For most HELOCs, you will receive special checks or a credit card, and you can borrow money for a specified time from when you open your account. This time period is known as the “draw period.” During the “draw period,” you can borrow money, and you must make minimum payments. When the “draw period” ends, you will no longer be able to borrow money from your line of credit. After the “draw period” ends you may be required to pay off your balance all at once or you may be allowed to repay over a certain period of time. If you cannot pay back the HELOC, the lender could foreclose on your home.
Home equity loan
A home equity loan (sometimes called a HEL) allows you to borrow money using the equity in your home as collateral. Equity is the amount your property is currently worth, minus the amount of any existing mortgage on your property. You receive the money from a home equity loan as a lump sum. A home equity loan usually has a fixed interest rate – one that will not change. If you cannot pay back the HEL, the lender could foreclose on your home.
A mortgage loan modification is a change in your loan terms. The modification is a type of loss mitigation. A modification can reduce your monthly payment to an amount you can afford. Modifications may involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing or reducing your principal balance. If you are offered a loan modification, be sure you know how it will change your monthly payments and the total amount that you will owe in the short-term and the long-term.
Loss mitigation refers to the steps mortgage servicers take to work with a mortgage borrower to avoid foreclosure. Loss mitigation refers to a servicer’s responsibility to reduce or “mitigate” the loss to the investor that can come from a foreclosure. Certain loss-mitigation options may help you stay in your home. Other options may help you leave your home without going through foreclosure. Loss mitigation options may include deed-in-lieu of foreclosure, forbearance, repayment plan, short sale, or a loan modification.
If you are having trouble making your mortgage payments, or if you have been offered and are considering various loss mitigation options, reach out to a Department of Housing and Urban Development (HUD)-approved housing counselor.
You can use the Miss April's "Find a Counselor" tool to get a list of housing counseling agencies in your area that are approved by HUD. You can also call the HOPE™ Hotline, open 24 hours a day, seven days a week, at (888) 995-HOPE (4673).
Mortgage insurance or private mortgage insurance (PMI)
Mortgage insurance protects the lender if you fall behind on your payments. Mortgage insurance is typically required if your down payment is less than 20 percent of the total loan amount. Mortgage insurance also is typically required on FHA and USDA loans. Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay if you have a conventional loan. Under certain circumstances, you can cancel your PMI.
Your payoff amount is how much you will actually have to pay to satisfy the terms of your mortgage loan and completely pay off your debt. Your payoff amount is different from your current balance. Your current balance might not reflect how much you actually have to pay to completely satisfy the loan. Your payoff amount also includes the payment of any interest you owe through the day you intend to pay off your loan. The payoff amount may also include other fees you have incurred and have not yet paid.
Active duty servicemembers may be given permanent change of station (PCS) orders. PCS orders are an official relocation of a servicemember (and any family living with them) to a different duty location. If the servicemember owns a home, they may choose to sell it. If the servicemember owes more on the home than the home is worth, they may have trouble selling their home. Some servicers offer programs to allow servicemembers to sell their home and not have to pay back the rest of the loan balance. Visit servicemember resources for more information.
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home. Not all mortgages have a prepayment penalty.
Refinancing is when you take out a new loan and pay off and replace your old loan. Usually homeowners refinance to try to lower their monthly interest rate and mortgage payment. For example, you might be able to get a new mortgage with a lower interest rate when interest rates fall. When you refinance, you usually have to pay closing costs and fees. Keep in mind that if you refinance with a mortgage that has a lower interest rate, but a longer term, you could end up paying more over the life of your loan. To avoid this, consider a mortgage that has the same or fewer months than are left on your current mortgage.
A repayment plan is a structured way to make up your missed mortgage loan payments over a certain period of time. This is a type of loss mitigation. If you have trouble making your mortgage payments, your lender or servicer may allow you to enter into a repayment plan. Before entering into a repayment plan, make sure you understand the requirements of the plan and whether you will be able to make the new payments.
A reverse mortgage is a type of loan that typically allows homeowners age 62 or older to borrow against the equity in their homes. Most reverse mortgages today are called Home Equity Conversion Mortgages (HECMs), insured by the Federal Housing Administration (FHA). Equity is the amount your home is currently worth, minus the amount of any existing mortgage on your home. It is called a “reverse” mortgage because, instead of making payments to the lender, you receive money from the lender. The money you receive, and the interest charged on the loan, increases the balance of your loan each month. Over time, the loan amount grows. Since equity is the value of your home minus any loans, you have less and less equity in your home as your loan balance increases, which could become a problem if you ever want or need to move. Learn more about .
Right of rescission
The right of rescission refers to the right of a consumer to cancel certain types of loans. If you are buying a home with a mortgage, you do not have a right to cancel the loan once the closing documents are signed. However, if you are refinancing a mortgage, you have until midnight of the third business day after the transaction to rescind (cancel) the mortgage contract. The three-day clock does not start until you sign the credit contract (usually called the promissory note), you receive a Truth in Lending disclosure form, and you receive two copies of a notice explaining your right to rescind.
Your mortgage servicer is the company that sends you your mortgage statements. Your servicer also handles the day-to-day tasks of managing your loan.
Your loan servicer typically processes your loan payments, responds to borrower inquiries, keeps track of principal and interest paid, and manages your escrow account (if you have one). The loan servicer may initiate foreclosure under certain circumstances. Your servicer may or may not be the same company that originally gave you your loan.
A short sale is a sale of your home for less than what you owe on your mortgage. A short sale is an alternative to foreclosure, but because it is a sale, you will have to leave your home. If your lender or servicer agrees to a short sale, you may be able to sell your home to pay off your mortgage, even if the sale price or proceeds turn out to be less than the balance remaining on your mortgage. A short sale is a type of loss mitigation. If you live in a state in which you are responsible for any deficiency, which is the difference between the value of your property and the amount you still owe on your mortgage loan, you will want to ask your lender to waive the deficiency. If the lender waives the deficiency, get the waiver in writing and keep it for your records.
A VA-backed loan is a loan offered through a program run by the Department of Veterans Affairs (VA). These programs are intended to help servicemembers, veterans, and their families buy homes. The VA does not make loans, but rather sets the rules for who may qualify and the terms under which mortgages may be offered. The VA also guarantees a portion of the loan to reduce the risk of loss to the lender. The loans generally are only available for a primary residence. Learn more about VA loans.