A type of mortgage (commonly called an ARM) in which the interest rate is tied to a certain economic index and may adjust at certain times. The initial interest rate is usually lower than that offered with a fixed-rate mortgage (also known as a teaser rate). This means that the monthly repayment amount will also be lower. However, your monthly payment may go up or down at intervals specified in the ARM product disclosure, depending on the current interest rate. Most adjustable-rate mortgage programs offer the protection of a rate cap, which limits the amount the rate can be increased each year, as well as over the life of the loan.

The lower initial rate of an ARM can increase purchasing power and enable a buyer to purchase a more expensive home than may be possible with a fixed-rate mortgage. Keep in mind that the interest rate may increase in future years, making future monthly payments higher.

The date the interest rate changes for an adjustable-rate mortgage. To change to another type of loan, such as a fixed-rate loan, contact your lender at least 3 months before this adjustment date, but know that not all ARMs have a conversion option.

The amount of time between the adjustment dates for an adjustable-rate mortgage. For example, the interest rate for a six-month ARM will go up, down, or stay the same every six months.

The periodic repayment of the loan balance. As you pay each month, a portion goes to the loan principal and a portion goes to the interest. An amortization schedule shows the balance after each payment is made.

A short-term, fixed-rate mortgage loan with fixed monthly payments followed by one large final payment to pay off the loan balance (the 'balloon'). The mortgage is amortized over the full term of the loan repayment period resulting in lower monthly payments, but at the end of a specified period the balance of the mortgage comes due. For example, with a 7-year balloon you would make monthly payments for seven years that have been calculated based on a 30-year mortgage payment. At the end of the seven years, the remaining principal balance is due and payable in full.

The final lump sum payment made at the maturity date of a balloon mortgage. You may be able to refinance the loan when this payment is due; check with your lender for this possibility.

Also called settlement. Closing is the conclusion of a real estate transaction. Documents that transfer legal ownership of the property are signed and closing costs are paid at this time.

Costs necessary to transfer ownership of a property and to close your mortgage loan. These may be paid by the buyer and/or the seller, and may include an origination fee, attorney's fee, taxes, and charges for obtaining title insurance and a survey. Closing costs will vary according to geographic location.

A borrower's total monthly debt divided by gross monthly income and shown as a percentage. (Example: If debt = $1,200 and gross monthly income = $5,000, then the Debt-to-Income Ratio would equal $1,200 divided by $5,000 or 24%.) Total monthly debt includes monthly mortgage payments as well as student loans, car loans, and credit card payments. Also called the back-end ratio or total debt ratio.

A decrease in the value of a property due to market conditions or other causes.