Interest Only Home Loan Glossary

While an interest only home loan will include most of the standard terminology of the mortgage industry, there are a few of special interest. This glossary includes both standard mortgage terms as well as some that are of particular interest to those seeking an interest-only mortgage:

Adjustable-Rate Mortgage (ARM) - An ARM is a mortgage loan with an interest rate that fluctuates periodically according to market conditions. ARMs typically have an initial fixed-rate period of a few years.

Amortization - A payment schedule that spreads the interest and the principal across the term of the mortgage loan. At the end of the amortization, the full mortgage will have been paid.

Annual Percentage Rate (APR) - This is the annual cost of the mortgage loan. The APR includes interest, charges and fees. The APR will be printed in bold print in your loan agreement as dictated by federal law.

Balloon payment - A balloon payment is the final installment payment for an interest only home loan. It is usually the remaining principal (should the borrower have made additional payments against the principal) plus interest. Typically, if this payment cannot be paid by some expected windfall of cash, the borrower will plan either to sell the property or refinance the balloon payment.

Credit Score - Developed by Fair Isaac Corporation (FICO), your FICO credit score is calculated using a mathematical algorithm based on your credit history. The result is a numerical representation of your credit history of between 300 (poor) to 850 (perfect).

Equity - The amount of value in a home, which is equal to the difference between its current appraised value and the outstanding balance of the mortgage loan.

Fixed-Rate Mortgage - A fixed-rate mortgage sets the interest rate for the loan for the full term of the loan. Due to their permanent rate, regardless of economic fluctuations, the rate is typically higher than for other loan types.

Interest Rate - The fee a borrower pays over the term of a loan over and above the principal of the loan for the service of borrowing the mortgage.

Mortgage - A written document providing evidence of a lien, or promise, against a property taken by a lender as collateral until a loan is fully repaid. In other words, it is the agreement to repay the loan for a home or other real property.

Prepayment - Early repayment of a mortgage or other loan.

Refinancing - This is the practice of taking out a new mortgage to pay off an old one. Refinancing can also be instituted to get a lower interest rate or to fold in a home equity loan into your mortgage.

Second Mortgage - This type of loan is a second mortgage taken out against a property that is already mortgaged, often referred to as a home equity loan or simply as "a second."

Term - This is the period of time during which a mortgage is in effect. It can also refer to a sub-period of time, such as the interest only term, which may represent the first few years of an interest only home loan.