Impound 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 6 months of
property taxes, your first 2 months of hazard insurance, and your
first 2 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. An
impound account is also called an escrow account.

See: Closing costs

Income property

Any property, including land, which earns you money

Renting out a home that is not your primary residence is one
way to use property to make money. Other examples of income
property are: vineyards that grow grapes to make wine, parking
lots with hourly fees and gas stations. An income property, like
an apartment building with more than 4 living units, is normally
appraised, mortgaged and taxed differently than a primary,
owner-occupied residence.

See: Investment property

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’s 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 and (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, Interest\Interest rate, 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
candy bars with $10 one day, and inflation rockets up 10% the
next day, you’ll only be able to buy 9 candy bars 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
$300,000 and inflation goes up 10%, your home is now worth
$330,000. 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%.

See: Interest\Interest rate

Initial interest rate

The starting interest rate of an adjustable rate mortgage
(ARM)

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

Regular payments given to a lender to repay a mortgage

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

A type of financing where a seller legally owns a property
until the buyer repays the loan

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’s 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.

Compare: Wraparound mortgage

Insurance

See: Home owner’s insurance, Hazard insurance, Private
mortgage insurance, Mortgage life insurance

Interest/Interest rate

The cost for borrowing a lender’s money

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 and (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 a
ceiling 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: Initial interest rate

Investment property

Any property that you buy to make a profit - either from
renting or selling it

Investing in real estate can be extremely profitable venture –
it’s 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 3 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 and (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’re 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.

See: Capital gains tax, Appreciation