A Mortgage Glossary for Home Buyers

Article excerpt

Searching for a mortgage can be a confusing task, especially for first-time buyers. But knowing some basic terminology can make it easier to choose the right loan:

Adjustable-rate mortgage, or ARM - A mortgage in which the interest rate is adjusted periodically based on a specific index.

Amortization - The reduction of a loan balance by equal periodic payments.

Assumable mortgage - A mortgage loan allowing the buyer of a property to take over the loan of the previous owner at the same interest rate and terms as the original mortgage.

Balloon mortgage - A mortgage calling for monthly payments for a specified period of time and then the entire balance due in one installment.

Buy-down - Money paid by a seller to a lender to reduce the buyer's monthly payments for a home mortgage for an initial period of years.

Conforming loan - A conventional loan that is $203,150 or less, meaning it "conforms" to the guidelines necessary for lenders to sell it to Freddie Mac or Fannie Mae on the secondary mortgage market.

Conversion option - A clause in an agreement with a lender that allows the borrower convert an adjustable-rate mortgage to a fixed-rate mortgage at designated times.

Discount points - A one-time charge used to adjust the lender's yield on the loan to what market conditions demand; each point is equal to 1 percent of the mortgage amount.

Fixed-rate mortgage - A mortgage on which the interest rate is set for the term of the loan.

Graduated-payment mortgage - A type of flexible-payment mortgage in which payments increase over five to 10 years and then level off.

Growing-equity mortgage - A mortgage with a fixed interest rate and extra payments to be applied directly to the principal.

Margin - The amount a lender adds to an ARM's index to adjust the rate.

Negative amortization - A loan payment schedule in which the outstanding principal balance goes up because payments do not cover the full amount of interest due.

Non-conforming, or jumbo, loan - Any conventional mortgage loan that is more than $202,300, the limit for loans bought by quasi-governmental agencies on the secondary mortgage market, such as Freddie Mac and Fannie Mae. …