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The Homebuyer's Mortgage Dictionary

Knowing that you’re ready to buy a home can be an exhilarating feeling, except it’s often followed by panic. While experience is the best teacher, there are some things you can do to regain control of the home-buying experience. One of them is getting accustomed to the terminology, especially when it comes to the various types of mortgages available.

LearnVest offers the following list of mortgage terms any first-time homebuyer should add to their dictionary:

  1. Adjustable-Rate Mortgage (ARM). An adjustable-rate mortgage is a home loan with fluctuating interest rates. ARMs are very much a game of chance, starting off with a period of 3 – 10 years of low fixed rates, followed by an adjustable roller coaster-rate period. In short, your interest rate will reflect whatever is happening in the market. This might be highly anxiety-inducing if you’re not planning to sell by the time the rates adjust higher, but there’s a chance that you will end up paying less if market trends are in your favor.
  2. Fixed-Rate Mortgage. This is the total opposite of the ARM. Instead of offering a fluctuating rate, you sign on for the same rate throughout the course of your mortgage loan. There are no surprises here, but the downside is that you must pay the same fee even if the market rates drop. There is some wiggle room thanks to refinancing, but fees and potential hassles come with it.
  3. Assumable Mortgage. This is a wild card that only becomes possible once in a blue moon. For this kind of mortgage, you take on the seller’s mortgage loan instead of taking out a new one for yourself. This helps when the market rate is higher than what the seller had it fixed at, plus it cuts some fees in the process. Yet, be aware that the seller’s lender must give you the green light, as well. The other curve ball is that the home-selling price might surpass that of the mortgage balance.
  4. Balloon-Payment Mortgage. This mortgage option is like playing a game of “Super Smash Brothers” in which you’re given 5 to 7 years of low monthly payments followed by a sudden death knockout match where you must make a giant final payment. Homebuyers tend to pick this type of loan because they expect to sell their home before the final payment while enjoying low interest rates during their ownership years. Another solution is applying for a new loan, but, of course, who’s to say you’ll get it? And that’s where the sudden death part comes in: the balloon may just explode.