Loan Definitions

Annual Percentage Rate (APR)
APR is the interest rate plus points and fees added together and amortized over the entire term of the loan. This calculation was introduced through federal law as a way for borrowers to compare loans.

Caps
Caps are change limits for ARM interest rates. Caps reduce the risk of extreme interest rate fluctuations by specifying a maximum and minimum amount of interest rate change for a loan. Interim caps limit rate fluctuation at the loan's regularly scheduled intervals of change. Life caps define a maximum interest rate over the entire life of the loan.

Conforming
A term that refers to the loan amount limits and standards set by Fannie Mae and Freddie Mac, the two largest secondary market investors in mortgage loans. The limits and standards are updated annually by these agencies. If a loan meets these standards, it is referred to as a conforming loan.

Index
The interest rates for Adjustable Rate Mortgages (ARMs) are typically computed based on an index. Common mortgage loan indexes include: Treasury Bills, 11th District Cost of Funds (COFI), and London Inter-Bank Offering Rate (LIBOR). A mortgage lender calculates an ARM's interest rate by adding its profit percentage to the index. As the index changes, so does the ARM's interest rate.

Jumbo
Jumbo loan refers to loan amounts that exceed the conforming loan limits set by Fannie Mae and Freddie Mac, the two largest secondary market investors in mortgage loans.

Margin
The amount of profit that a mortgage lender gets from an ARM. Profit is usually achieved by adding a margin (usually a percentage) to a loan index to achieve a fully indexed rate, which is the interest rate you pay.