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Impound (or Reserves)
Portion of a borrower's monthly payments held by the lender to pay for taxes, insurance, and other items as they become due.
Impound Account
See Escrow Account
Index
A published rate used by lenders to calculate interest adjustments on adjustable rate mortgages (Index + Margin = Interest Rate). Common indexes include 1-Year Treasury securities, COFI (Cost Of Funds Index) and Six-Month LIBOR (London Interbank Offered Rate).
Initial Rate
The rate charged during the first interval of an adjustable rate mortgage.
Insolvency
Condition of a person unable to pay debts as they fall due.
Interest
Interest is money you pay a lender for the use of their money. When a lender loans you money, the lender wants all the money back plus a fee for the use of that money. It is usually expressed in terms of a percentage of the principal. There are several ways to identify interest rates. In its basic form interest can be a flat percentage of the initial amount loaned. If you borrow $1,000 and agree to pay 10% interest, paying the loan back in one payment at the end of the year, you will pay $100 in interest for a total of $1,100. Mortgage interest is usually more complicated since the loan can extend for thirty years and payments can be made at regular intervals of months or weeks. Interest rates are usually quoted for a one-year period and the monthly interest applied to a monthly payment is one-twelfth of the interest. If your annual interest is 12%, your monthly interest rate is 1%. The annual percentage rate (APR) actually is different from the interest you will pay, though. The actual interest rate you will pay is known as the effective rate. The difference is not great, but can add up to a substantial amount when the difference is accumulated over many years. As an example, let us take the same $1,000 at 12%. At the end of the first month, January, the interest paid is 1% so the balance becomes $1,010, less a payment of $88.85. The February balance is $921.15. Now the 1% of the new balance is $9.21, not $10 as was the first month. Minus a payment of $88.85 and the new March balance is $841.51. As you can see, you are paying $88.85 for 12 months, for a total of $1,066.20. This calculates to an effective interest rate of 6.62% ( $1,066.22 / $1.000).
Interest
Charge paid for borrowing money.
Interest Rate
The rate expressed as a percentage of the outstanding balance used to calculate interest charges.
Interest Rate Cap
A safeguard built into ARMs to prevent drastic changes in interest rates.
Investment interest
Interest paid on loans used for investment purposes. You can deduct this interest up to the amount of investment income you report