Additional Banking Industry Words and Phrases

Here are some additional words and phrases used by Banking Professionals:

Adjustable-Rate Mortgages (ARMS)

Also known as variable-rate mortgages. The initial

interest rate is usually below that of conventional fixed-rate loans. The interest rate may

change over the life of the loan as market conditions change. There is typically a maximum

and a minimum defined in the loan agreement. If interest rates rise, so does the loan payment.

If interest rates fall, the loan payment may as well.

Appraisal

The act of determining the value of a property by an outside source. Common in real estate transactions

Automated Clearing House (ACH)

Used by member banks to electronically distribute interbank credits and debits. For instance, if you are being paid automatically by your employer, electronically taking the money from your employer’s account and then putting the money in your account is an example of ACH.

Balloon Loan

A balloon loan usually offers lower payments through the life of the loan, with

a large amount of money being due at the end of the loan term.

Cash-out refi

Cash out refinance. Takes your current mortgage balance and allows you to

borrow up and above that based on the amount of equity you have in your home, with you getting the extra money for use. It is more common in low interest rate environments. The money can be used for anything.

CD

Certificate of Deposit. Shorter to medium length deposit with a financial institution that draws interest. These are set for a specific term and have a specific maturity date, where if you withdraw the funds early, you would pay a penalty. Compared to savings account, you typically get more interest, but you don’t have immediate access to your funds.

Collateral

Simply, these are assets pledged by a borrower to secure a loan. In the case of

default, these assets can be taken by the lender.

Construction Loan

A loan to a buyer or builder that allows for the construction/purchase of

a property. The construction loan is short-term and the loan is often converted to permanent financing at the end of the construction period.

Credit Life Insurance

An insurance policy that pays a borrower’s debt if he or she dies.

Debt-to-Income Ratio (DTI)

The total amount of fixed monthly expenses divided by monthly

gross income. Monthly fixed expenses would include expenses like a house payment, credit card balances that would take more than six months to pay off, car payments and support payments. Payments that would be paid off in several months or less would not be included, expenses like groceries, telephone bill and utility bills.

Direct Debit

Where a customer gives a bank the authority to directly pay a bill to a third

party. This is commonly done with recurring payments

Electronic Funds Transfer (EFT)

Any transfer of funds that is initiated by electronic means,

such as computer, telephone, ATMs or point of sale.

Escrow

Held by impartial party on behalf of the parties in a transaction. Securities, funds, and other assets can be held in escrow. An escrow can be held by a third party for delivery to a participating party at the completion of certain conditions. They can be held/collected by a financial institution for the purpose of paying taxes and insurance on a home loan.

Equity

The amount of value that a homeowner owns in his/her home. In terms of the

mortgage, it is the home’s value minus the amount of the mortgage loan outstanding

Foreclosure

When a homeowner’s legal rights to the property are terminated. Usually

caused by default on a mortgage loan

HELOC

Home Equity Line of Credit. Credit secured by equity in a borrower’s home. Funds can be used for any number of purposes. This is an open-ended, or revolving, line of credit.

Origination fee – A loan fee charged by banks to help cover bank processing costs. In a mortgage loan, for instance, the origination fee is often 1%. So, if you have a $100,000 loan, your origination fee would be $1,000.

“P & I”

Principal and interest. This refers to a loan payment that includes both the principal on the loan and the interest on the loan.

Private Mortgage Insurance (PMI)

Private insurance that protects the bank against loss on a defaulted mortgage up to the limit of the policy (usually 20 to 25 percent of the loan amount.) The borrower pays the insurance premium upfront or monthly.

Reverse Mortgage

A reverse mortgage is a special home loan product that allows a

homeowner aged 62 or older to access the equity that has accumulated in their home. The home itself will be the source of repayment. The loan is underwritten based on the value of the collateral (home) and the life expectancy of the borrower. The loan must be repaid when you die, sell your home, or no longer live there as your principal residence.

Secured Loan

A loan where a borrower pledges some sort of asset as collateral for the loan, such as a vehicle or a property

Short Sale

In real estate, a short sale means selling the home for less than the existing

amount of the mortgage

Title Insurance

Protects the lender/owner of a property against loss in the case of a

property dispute. Often required by lending institutions when issuing a mortgage.

Trust Account

A certain type of account ownership. Generally, it is set up for the benefit of

others. This may be managed by a trust department or a trustee.

Unsecured Loan

This loan is not secured by any sort of collateral, and is instead given

solely on the basis of the borrower’s good credit.

WIRE TRANSFER

An electronic transfer of funds from one point to another. Funds can be

transferred between accounts at different financial institutions in different states or different countries that have been approved to transfer funds in this manner.