A conventional fixed-rate mortgage offers you a set rate and payments that do not change throughout the life or "term", of the loan. A conventional loan is fully paid off over a given number of years, usually 15, 20 or 30.

A portion of each monthly payment goes towards paying back the money you borrowed, the "principal", and the rest is "interest". Any money paid into the value of the house, including your down payment, is known as "equity" in the home. For instance, if your house is worth $100,000 and you owe $65,000 on your mortgage, then you are said to have 35% equity in your house

This is a special type of conventional, fixed-rate mortgage with a much shorter term. In a balloon mortgage, the terms and payments are usually the same as their conventional loan counterpart, but the balance is due in full on the loan at the end of a specified, much shorter term.

For example, a seven-year balloon mortgage would be calculated to have the same payments as a 30-year loan, with the borrower paying the same amount in interest and principal each month. However, at the end of seven years whatever balance is left on the loan is due. At this point, the borrower may either pay out the loan in full or refinance with a new loan.

Balloons are often priced better than conventional, fixed-rate mortgages because of the certainty to the lender of the mortgage term.

This is a limit specified in the ARM loan for individual and cumulative interest rate adjustments. An example of this is a 2/6 cap, which allows the interest rate on your ARM loan to go up or down by no more than two percent every adjustment period, and has a total limit of six percent for cumulative changes. Therefore a 2/6 cap on a 5% ARM will allow a maximum rate of no more than 11%.

"Buydowns" usually refer to a borrower "buying down" the interest rate on a loan. This is the same concept as paying "points" on a loan, except that points buydown (or up) the rate of a loan over the entire term while a buydown is usually only a temporary reduction.

A temporary buydown on a loan is achieved by lowering the rate for the first few years, starting out at a lesser amount and gradually rising to the original loan rate. Of course, because the loan rate is lower for the initial few years, so are the payments. To make up this loss of funds to the lender, the buydown usually consists of extra monies paid up front to the lender when the loan closes. In return, the lender will let the borrower "qualify", or meet the criteria for the loan, at the new, reduced rate.

An example of a temporary buydown on a loan is a 2/1 Buydown. Assume we have a 30-year conventional loan with an interest rate of 9%. A 2/1 buydown would make the interest rate for the first year of the loan equal to 7%, the second year 8% and 9% from then on. The borrower could qualify for the loan (under some loan programs) as if it were a 7% loan.