Building on Trust™
Term  Main definition 

Impounds 
Same as Escrow.

Indexed ARM 
An ARM on which the interest rate adjusts mechanically based on changes
in an interest rate index, as opposed to a "discretionary ARM" on which the
lender can change the rate at any time subject only to advance notice. All
ARMs in the US are indexed.

Initial interest rate 
The interest rate that is fixed for some specified number of months at the beginning
of the life of a an ARM. The initial rate is sometimes referred to as a "teaser" when
it is below the fully indexed interest rate.

Initial rate period 
The number of months for which the initial rate holds, ranging from 1
month to 10 years.

Interest accrual period 
The period over which the interest due the lender is calculated. If the interest
accrual period on a 6 % mortgage for $100,000 is a year, as it is on some
loans in the UK and India, the interest for the year is .06($ 100,000) =
$6,000. If interest accrues monthly, as it does on most mortgages in the
US, the monthly interest is .06/12($l 00,000) = $500. If interest accrues
biweekly, as on a few programs in the US, the biweekly interest is .06/26
($100,000) = S230.77. And if interest accrues daily, as HELOCs and some
other mortgages in the US do, the daily interest is .06/365(5100,000) =
$16 .44.

Interest cost 
A timeadjusted measure of cost to a mortgage borrower. It is calculated
in the same way as the APR except that the APR assumes that the loan
runs to term, and is always measured before taxes. The formula is shown
in Mortgage Formulas. Interest cost is measured over the individual
borrower's time horizon, and it may be measured after taxes at the
individual borrower's tax rate. In addition, the cost items included in
interest cost may be more or less inclusive than those included in the
APR.

Interest due 
The amount of interest, expressed in dollars, computed by multiplying the loan
balance at the end of the preceding period times the annual interest rate divided
by the interest accrual period. It is the same as interest payment except when
the scheduled mortgage payment is less than the interest due, in which case the
difference is added to the balance and constitutes negative amortization.

Interest payment 
The dollar amount of interest paid each month. It is the same as interest due so long
as the scheduled mortgage payment is equal to or greater than than the interest due.
Otherwise, the interest payment is equal to the scheduled payment.

Interest rate 
The rate charged the borrower each period for the loan of money, by custom quoted
on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. A
mortgage interest rate is a rate on a loan secured by a specific property.

Interest rate adjustment period 
The frequency of rate adjustments on an ARM after the initial rate period
is over. The rate adjustment period is sometimes but not always the same
as the initial rate period. As an example, a 3/3 ARM is one in which both
periods are 3 years while a 3/1 ARM has an initial rate period of 3 years
after which the rate adjusts every year.

Interest rate ceiling 
The highest interest rate possible under an ARM contract; same as "lifetime
cap." It is often expressed as a specified number of percentage points above
the initial interest rate.

Interest rate decrease cap 
The maximum allowable decrease in the interest rate on an ARM each
time the rate is adjusted. It is usually 1 or 2 percentage points.

Interest rate floor 
The lowest interest rate possible under an ARM contract. Floors are less common
then ceilings.

Interest rate increase cap 
The maximum allowable increase in the interest rate on an ARM each time
the rate is adjusted. It is usually 1 or 2 percentage points, but may be 5 points
if the initial rate period is 5 years or longer.

Interest rate index 
The specific interest rate series to which the interest rate on an ARM is
tied, such as "Treasury Constant Maturities, 1Year," or "Eleventh District
Cost of Funds." All the indices are published regularly in readily available
sources.
