What are some more common terms I should know?

More common terms explained

When the time comes to choose your loan terms and sign the papers for your new mortgage , there is plenty of mortgage terminology that will be presented to you.

During the loan process, you will typically be asked to choose between an ARM and a fixed rate. ARM refers to adjustable rate mortgages and fixed rate refers to mortgages with more constant interest rates.

An ARM loan has an interest rate that adjusts according to the predetermined loan terms, so even though you may start out with a low interest rate, it can increase over the life of the loan. A fixed rate mortgage does not feature interest rate adjustments, but the initial interest rate is usually higher than the initial rate of an ARM.

You may also be asked about the length of amortization. This is just another way to ask how many years you want to pay on the loan. Common amortizations include 30, 20 and 15 years for first mortgages.

Another option you might be given is whether you want to pay points on your mortgage. Points refer to a method by which you pay a certain amount of money in order to buy down your interest rate. Some lenders allow you to roll the cost of the points into your loan.

If “balloon payment” enters the discussion, be aware of what this means. A balloon payment is a loan which is payable over a certain amortization (for example, 30 years) but comes due sooner (for example, 10 years). Balloon payments are relatively common for investment properties and interest-only mortgages, but it may be best to avoid this type of loan for your primary residence.