Balloon Mortgage

A short-term fixed-rate mortgage loan which features small payments for a certain period of time and one large payment for the remaining amount of the principal, paid as the final installment.

Balloon Payment

The final payment of the unpaid principal made at the end of the term of a balloon mortgage loan.

Capped Rate

A capped rate is an agreed upon maximum interest rate provided by a lender. The borrower is guaranteed that the rate on the mortgage will not be charged above this fixed rate.

However, if the variable mortgage rate falls below the capped rate, the borrower is charged the lesser variable rate.

Construction Loan

A short-term loan provided by a lender to a builder to finance the cost of construction. Generally, the lender advances payment to the builder as work progresses.

Conventional Loan

A mortgage loan that is not insured or backed by a government agency such as the FHA or VA.

Earnest Money

A deposit made by a potential homebuyer as a show of good faith in completing the transaction.

Escrow

Funds held by a third party in a real estate transfer until all terms of the contract of sale are met. Can also refer to an account where part of the homebuyer's mortgage payment is held back to pay property taxes and insurance.

Home Equity Line of Credit

A type of revolving credit in which the borrower is able to obtain cash drawn against the equity of his home. Can be tax-deductible, and is often used for home improvement, major expenses, or debt consolidation.

Home Equity Loan

A loan that allows owners to borrow against the equity in their homes. This is closed-end loan repaid on a fixed schedule.

Income to Debt Ratio

A qualifying ratio used in underwriting a residential mortgage loan, which states the percentage of debt as it relates to monthly income. Generally used by lenders to determine how much house a buyer can reasonably afford.

Interest

Money added to the loan to compensate the lender for the use of the lender's money to purchase the borrower's home. This type of mortgage interest is usually tax deductible.

Loan Points

Sometimes called "discount points." Points refer to money paid to a lender at closing in exchange for a lower interest rate. Each point is equal to 1% of the loan amount. For example, if a loan is for $30,000, one point is $300.

Pre-Approved

Means that a potential buyer has been screened by his/her lender and has been "pre-approved" to borrow up to a certain amount. Lenders take into consideration the borrower's income, debt, and credit history in the pre-approval process.