Business Glossary

mortgage in which all principal is paid off in a specified period of time through periodic interest and principal payments. The most common self-amortizing mortgages are for 15 and 30 years. Lenders will provide a table to borrowers showing how much principal and interest is being paid off each month until the loan is retired.

mortgage with a fixed interest rate and growing payments. This technique allows the homeowner to build equity in the underlying home faster than if they made the same mortgage payment for the life of the loan. Borrowers who take on GEM loans should be confident in their ability to make higher payments over time based on their prospects for rising income.

interest cost paid by a financial institution for the use of money. Brokerage firms' cost of funds are comprised of the total interest expense to carry an inventory of stocks and bonds. In the banking and savings and loan industry, the cost of funds is the amount of interest the bank must pay on money market accounts, passbooks, CDs, and other liabilities. Many adjustable rate mortgage loans are tied to a cost-of-funds index, which rises and falls in line with the banks' interest expenses.

introductory interest rate on an adjustable rate mortgage (ARM) designed to entice borrowers. The teaser rate may last for a few months, or as long as a year, before the rate returns to a market level. In a competitive mortgage market, some mortgage lenders may offer competing teaser rates to try to win over potential borrowers. In addition to the marketing rationale for teaser rates, lenders maintain that having a low initial rate makes it easier for homeowners to settle into a new home, with all the expenses entailed in moving in. Only portfolio lenders can offer teaser rates. Mortgage bankers cannot because they must comply with investor guidelines.

federal tax deduction allowed for interest paid or accrued within the taxable year with respect to mortgage indebtedness. Interest is deductible on mortgages secured by principal homes and second homes. A taxpayer may not write off interest on any part of the mortgage that exceeds the original purchase price plus improvements of property, unless the taxpayer uses the money for medical or educational purposes.

Bonds: highest level interest rate that can be paid on a floating-rate debt instrument. For example, a variable-rate note might have a cap of 8%, meaning that the yield cannot exceed 8% even if the general level of interest rates goes much higher than 8%.
Mortgages: highest interest rate level that an adjustable-rate mortgage (ARM) can rise to over a particular period of time. For example, an ARM contract may specify that the rate cannot jump more than two points in any year, or a total of six points during the life of the mortgage.
Stocks: short for capitalization, or the total current value of a company's outstanding shares in dollars. A stock's capitalization is determined by multiplying the total number of shares outstanding by the stock's price. Analysts also refer to small-, medium-, and large-cap stocks as a way of distinguishing the capitalizations of companies they are interested in. Many mutual funds restrict themselves to the small-, medium-, or large-cap universes. See also collar.

mortgage in which the borrower receives a below-market rate of interest in return for agreeing to share part of the appreciation in the value of the underlying property with the lender in a specified number of years. If the borrower does not want to sell at that time, he or she must pay the lender its share of the appreciation in cash. If the borrower does not have that amount of cash on hand, the lender may force the borrower to sell the property to satisfy their claim.