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7 Terms a Borrower Must Know

If you don't know the language, choosing a loan can be sort of like ordering dinner off the menu in a foreign country. Misunderstand a few words, and you could end up with something awful on your plate. And unlike a single meal, a loan could give you indigestion for many years. It's important to know what you're getting, so we've put together this basic translation guide. Here are 7 terms a borrower must know (http://www.lendingtree.com/smartborrower/Smart-Borrowing/7-terms-a-borrower-must-know.aspx):

1. Balloon mortgage

A loan structured with lower monthly payments and a large lump sum payment due at the end of the term. If the borrower can't pay the loan balance when it comes due, he could lose his house.

2. Home equity

Home equity (http://www.lendingtree.com/smartborrower/Using-your-home-equity/How-to-use-your-home-equity-wisely.aspx) is the market value of a home minus the outstanding balance of the mortgage or any other loans taken out against the value of the home. Protect your home's equity like a restaurant guards its five-star rating.

3. Loan-to-value ratio

Only slightly harder to calculate than the tip, your loan-to-value ratio (LTV) is the total amount of a mortgage divided by the appraised value of the property. If you make a $40,000 down payment and take out a $160,000 mortgage to buy a $200,000 house, your LTV is 80 percent.

4. Loan flipping

A predatory lending practice that involves repeated refinancings of a mortgage without benefit to the borrower. The lender profits from collecting fees and other charges that can whittle away at the borrower's home equity. The salmonella of the borrowing world.

5. Mortgage insurance

Also known as PMI (private mortgage insurance) (http://www.lendingtree.com/smartborrower/Private-mortgage-insurance/What-is-private-mortgage-insurance.aspx), mortgage insurance allows lenders to recover some of their losses if a borrower fails to repay a loan. Most lenders require a borrower to pay for mortgage insurance if their LTV is greater than 80 percent. But if you have to pay it, don't be too queasy about it: once your LTV falls below 80 percent, you may be able to cancel PMI.

6. Points

Fees that a mortgage lender charges for making a loan. One point is equal to one percent of the mortgage loan amount. Some lenders will offer a lower interest rate to borrowers willing to pay points upfront.

7. Prepayment penalty

A fee charged if a borrower pays off their loan before the end of the loan period. A prepayment penalty could give you heartburn when you want to refinance for a lower interest rate or sell your house before the mortgage term (which can often be 30 years) is up.

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