Understanding Home Loan Terminology

By Emily Kerr
Loan page Columnist

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Before entering into a mortgage or even choosing the type of home loan right for you, first-time home buyers must do their homework. But when you start your homework, you find a brand new language you're expected to know--and no explanation.

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Before you start your homework on home loans, do your homework on home loan terms. Here are some common home loan terms.

Annual Membership Fee

Like a credit card membership fee, this is a fee charged for having a line of credit available, whether or not it is used.

Annual Percentage Rate (APR)

Cost of credit on a yearly basis, expressed as a percentage.

Balloon Payment

Some loans are interest-only, or the payments on the principal aren't enough to pay the principal off during the loan term. A balloon payment is a lump-sum payment required when a loan term ends, to pay off the principal.

Cap

For variable rate loans, this is a limit on how much the variable rate may increase during the life of the loan.

Closing Costs

Administrative fees paid when the loan closes, including attorneys fees; fees for preparing and filing a mortgage; title search fees; taxes; and insurance.

Credit Limit

Under a home equity line of credit, home owners can borrow against their equity. A credit limit is the maximum amount that may be borrowed.

Equity

This is the difference between the appraised value of your home and the amount due on the mortgage.

Index

Published rate used as a base for interest rates charged on home equity lines and used by lenders to change rates.

Interest Rate

A periodic charge assessed for use of credit.

Margin

The number of percentage points the lender adds to the index rate to determine the annual percentage rate.

Points

One point is equal to one percent of the amount of a credit line. Points are paid at closing.

Variable Rate

This is an interest rate that changes when the index changes. Monthly mortgage payments may change accordingly.

Sources:

The Federal Reserve

About the Author

Emily Kerr is a freelance writer with more than 350 articles in print. She writes about topics from home construction to home loans, technology to education, people to pets, and everything in between.

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