Below we define some of the most commonly used terms & definitions used in the mortgage process.
Asset
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.
Before-Tax Income
Income before taxes are deducted.
Business Inventories And Sales
These figures measure the inventories and sales of manufacturing, wholesalers, and retail establishments. These figures are released monthly by the Bureau of Census. In most cases, an increase in these numbers indicates an expanding economy which could be inflationary. Bond Market Moves Down In Price.
Capacity Utilization
The capacity utilization rate measures the percent of industrial output currently in use. A change in the rate indicates a change in the direction of economic activity. As the percentage rate moves closer to 90% the industrial output is practically at full capacity and is inflationary. A number closer to 70% is recessionary. A higher percentage indicates a stronger manufacturing sector and an expanding economy which can be inflationary. Bond Market Moves Down in Price.
Compound Interest
Interest paid on the original principal balance and on the accrued and unpaid interest.
Consumer Price Index (CPI)
The consumer price index is an indicator of the general level of prices. Components include energy, food and beverages, housing, apparel, transportation, medical care, and entertainment. When the consumer price index goes up, it is a sign of an inflationary environment. Consumers have to pay more for the same amount of goods and services. Bond Market Moves Down In Price.
Deposit
This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.
Durable Goods Orders
This gives a reading on the country's future manufacturing activity. Durable goods include those manufactured items with a normal life expectancy of three years or longer. An increase in the amount of durable goods orders may indicate an expansion in the economy and, if inflationary, the Federal Reserve could choose to tighten money by raising interest rates. Bond Market Moves Down In Price.
Effective Gross Income
A borrowers normal annual income, including overtime that is regular or guaranteed.Salary is usually the principal source, but other income may qualify if it is significant and stable.
Effect Of Economic Indicators On Fixed Income Investments
Market participants look to U.S. Government economic releases as an indication of the economy's strength and general direction. Overall, economic indicators reflect the rate of economic growth and inflation which, in turn, affects interest rates. There is an inverse relationship between interest rates and bond prices. If the economic indicators indicate that the rate of inflation is on the rise, it will most likely result in higher interest rates and lower bond prices. Conversely, if these indicators indicate the rate of inflation is falling this will result in lower interest rates and higher bond prices. The following glossary defines what these indicators are and how they might affect the bond market.
Factory Orders
Manufacturer's shipments, inventories, and orders. Factory orders include shipments, inventories, and new and unfilled orders. An increase in the factory order total may indicate an expansion in the economy and could be an inflationary factor. Bond Market Moves Down In Price.
FED Is Easing
Exactly the opposite of Fed tightening. The Federal Reserve feels that the economy is not growing at the desired level and eases credit conditions by lowering interest rates to help stimulate the economy. Bond Market Moves Up In Price.
FED Is Tightening
This term refers to efforts by the Federal Reserve to curb excessive growth in the money supply. This can be accomplished by raising the discount rate and/or increasing the federal funds rate. Bond Market Moves Down In Price.
Gross National Product (GNP)
The Gross National Product is the broadest measure of the nation's production. It measures the market value of all newly produced goods and services in the United States. When GNP is down, it shows a slowing down in the economy. To counteract this, the Federal Reserve may loosen money by lowering interest rates. Bond Market Moves Up In Price.
Industrial Production Index
The industrial production index measures the monthly level of the physical output of the manufacturing, mining, and gas and electric utility industries. When industrial production is down, it indicates a slowing of economic growth and, therefore, the Federal Reserve is inclined to allow interest rates to drop to stimulate the economy. Bond Market Moves Up In Price.
Leading Economic Indicators
This index is a composite of 11 statistics designed to foretell economic activity 6 to 9 months hence, (i.e. building permits, new orders for consumer goods and materials, the average workweek, index of consumer expectations).
Line of Credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.
Liquid Asset
A cash asset or an asset that is easily converted into cash.
Merchandise Trade Balance
Released monthly, this figure measures the difference between imports and exports. When exports are higher than imports, there is a surplus in the balance of trade. When imports are higher than exports, there is a deficit. The import-export differential is referred to as the trade gap.
Money Supply
The amount of money in circulation. M1 = cash + regular demand deposits + other check-type deposits. M2 = M1 + savings and small denomination time-deposits. When the money supply figure is up, it is an inflationary factor and, therefore, generates concern that the Federal Reserve will tighten money growth by allowing short-term interest rates to rise. Bond Market Moves Down In Price.
Net Worth
The value of all of a person's assets, including cash.
Non-Farm Payroll
The non-farm payroll figure is a component of total civilian employment and measures the number of people employed in all activities except agriculture.
Non Liquid Asset
An asset that cannot easily be converted into cash.
Prime Rate
The interest rate that banks charge to their preferred customers.Changes in the prime rate influence changes in other rates, including mortgage interest rates.
Producer Price Index (PPI):
The monthly producer price index measures the level of prices for all goods produced and imported for sale in the primary marketplace. Increase in the PPI tends to lead other measures of inflation. Bond Market Moves Down In Price.
Retail Sales
Key components of retail sales include automobiles, building materials, furniture, department store sales, food stores, gasoline, clothing, restaurants and drugstores. High retail sales are an indication of economic growth and an expanding economy. Bond Market Moves Down In Price.
Treasury Index
An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
Unemployment Rate
This is the percent of the civilian labor force currently unemployed. If unemployment figures are up, it indicates a lack of expansion within the economy and is, therefore, good for the bond market. Conversely, a big gain in employment would be an obvious cue for the Federal Reserve to tighten (raise) either the federal funds rate or the discount rate. Bond Market Moves Up In Price.
