Home Loan Products Glossary

Loan Purposes:

Home Improvement Loan

A home improvement loan is used to pay for renovation or permanent upgrades to a house.

Refinance Loan

This is a new loan on a property that repays and replaces the existing home loan. It can be larger than the loan being repaid, providing the borrower cash from the home's equity.

Cash-Out

Cash-out refinancing refers to borrowing against some or all of the equity in a house when refinancing. This provides cash the homeowner may use for any purpose.

Equity

Equity is the difference between the current value of a home and the amount owed on the home loan. It represents additional value the homeowner may borrow against.

Purchase Loan

When buying real estate, a purchase loan is the type of home loan used.

Types of Loans:

Adjustable Rate Mortgage (ARM)

This type of loan has an interest rate that changes from time to time, according to a specific index.

Cap (Interest Rate Cap)

An interest rate cap restricts the amount an interest rate can increase or decrease at each adjustment or throughout the life of the loan.

Fully Indexed Rate

The fully indexed rate is the interest rate charged on a loan once the initial interest rate expires. It is the index rate added to the lender's margin specified in the loan note.

Index

This is a published economic indicator used by lenders to calculate interest rates. Examples include the Prime Rate, LIBOR and 6-Month U.S. Treasury Bills.

Initial Interest Rate

This is the interest rate on an ARM loan during its first months or years. An initial interest rate may be offered for 1, 2, 3 or 5 years, or just a few months.

Interest Rate Ceiling

This is the highest interest rate permitted on an ARM. It is also called a Lifetime Cap.

Margin

A margin is the number a lender adds to an index to calculate a fully-indexed interest rate.

Payment Cap

A payment cap restricts the amount a monthly mortgage payment can increase or decrease at each adjustment during the life of an ARM.

Balloon Mortgage

A balloon loan is a loan that features payments calculated over a specified period (e.g.: 30 years), but requires a lump sum payment of the full principal balance at the end of a shorter term (e.g.: 10 years). This results in affordable monthly payments until the full balance is due.

Fixed Rate Mortgage

This is a type of loan that offers monthly payments and an interest rate that don't change during the loan's life.

Combination Rate Mortgage

A Combination Rate Mortgage offers a fixed rate for the initial term, and then converts to an adjustable rate for the remainder of the term.