arrears

No matter how it sounds, this isn’t Scottish slang for derriere. Instead, it refers to being “behind” in payments. For example, an account that’s past due is “in arrears”. The term appears in contracts referencing a failure to pay on a sales, loan, or mortgage agreement.

APR

Americans owe a staggering $900 billion to credit card companies. That’s why most card-carrying members of the credit-card class aren’t surprised when the credit card company adds some sticker shock each month (for failing to pay their credit card off in full). These additional monthly interest payments are calculated using an annual percentage rate (APR) established by the federal government The APR is divided by twelve to arrive at a periodic interest rate, then multiplied against your monthly balance to come up with your monthly interest payment. References to APRs are often found in loan agreements and mortgages, or may be used in a contract as the standard for determining interest on late payments.

appurtenance

Real-estate contracts often reference things that “run with the land.” These are called “appurtenances,” and they come in two forms:

• a right associated with land—for example, the right to access land using a horse-trail, or
• property that’s attached to land—for example, a barn or a shed.

amortization

During the 1930s, homeowners purchased homes with much shorter mortgages (three to five years) than today’s 20-30 year loans. Down payments for these short mortgages ranged from 50% to 80% of the purchase price and ended with a large balloon payment. That may explain why more than half of the population rented and most of the rest were in danger of losing their homes during the Great Depression. In 1934, the Federal Housing Authority stepped in with a new system of government-backed mortgages, which required a much lower down payment, and spread repayment of the loan amount (the principle) and the cost of the loan (the interest) over a longer period, using a system called amortization. Using an amortized payment plan, the borrower—for example, in a mortgage or car loan—gradually pays less interest (and more principal) as the payment plan progresses.

EXAMPLE: Jake borrows $100,000 to purchase a condo at 8% interest and plans to pay it back over ten years. Although each of his120 monthly payments will be for the same amount ($1213), less than half of his first payment will go toward paying off the principal; the rest will pay the interest on the loan. As the principal is paid off, the interest owed decreases and the amount of each payment that goes toward the principal increases over the life of the loan, until only $8 of his final payment goes toward interest.

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[i] Service Employees International Union Local 503 v. State of Oregon (Ct. App. 2002).

[ii] Ibid.

accretion

When something gradually increases in size—for example, your spouse’s waistline or your boss’s ego—the process is known as accretion. Accretion also appears in contracts, such as:

• Financial contracts. Accretion refers to the process by which payments or value increase over time. For example, accretion occurs when a bond purchased at a discounted price ($175) matures to its face (or “par”) value ($250).
• Real estate contracts. Accretion refers to the increase in land size due to the forces of nature. For example, accretion occurs if a river changes course and sediment deposits increase the size of the property.
• Labor union contracts. An accretion clause dictates what happens to employees in one company if they are transferred to another company whose employees are already represented by a union.

An accretion clause spells out how the extra money, property, or people will be treated (for example, who will own the land created by sedimentation).