Your Mortgage Glossary: Confusing Terms Explained

If you're among the many prospective homeowners lost in a welter of ARMS, FRMs, caps, bridge loans, PITIs and balloon payments, here are a few facts on financing that may help.

For starters, you should know that an ARM (adjustable-rate mortgage) is a loan with an interest rate that is periodically adjusted to reflect changes in a specified financial index.

A FRM is a fixed-rate mortgage, a home loan with an interest rate that will remain at a "fixed" or "steady" rate for the term of the loan. About 75 percent of all home mortgages have fixed rates.

A balloon payment, alas, is not nearly as much fun as it sounds. It's the final lump sum payment due at the end of a balloon mortgage. On the other hand, PITI is not as pathetic as it sounds. PITI stand for Principal, Interest, Taxes, Insurance. When a buyer applies for a loan, the lender will calculate the principal, interest, taxes and insurance. The figure is designed to represent the borrower's actual monthly mortgage-related expenses.

As for caps and bridges, they have nothing to do with teeth. A cap is a limit on how much the interest rate on an ARM loan can change in an adjustment period or over the life of the loan. For example, if your adjustment cap is one percent and your current rate is six percent, then your new rate will be between five and seven percent. A cap payment is a limit to how much monthly payments on an ARM can change at each adjustment period. A bridge loan, also known as a swing loan, lets a borrower get financing for a new house before his present house is sold. The present home is used as collateral.

Other terms it may pay you to understand include:

• Adjustment period: The amount of time between interest rate adjustments in an adjustable-rate mortgage.

• Amortization: The process of paying the principal and interest on a loan through regularly scheduled installments.

• Compound interest: The interest paid on the principal balance in a mortgage and on the accrued and unpaid interest of the loan.

• Estimated tax savings: The amount of tax a renter would save by owning a home based on property taxes and interest paid.

• Mortgage-interest deduction: The tax write-off the IRS allows most owners to claim for interest paid on real estate loans.

• Variable rate mortgage: A loan with an interest rate that hinges on factors such as the rate paid on bank certificates and Treasury bills.

You can learn more about financing a home online at or in person at a Century 21 office.

When interest rates are volatile, borrowers may be able to "lock in" an interest rate. Lenders who oblige may limit the time the lock-in is in effect.

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