A mortgage in which monthly installments are not large enough to repay the loan by the end of the term. As a result, the final payment due is the lump sum of the remaining principal. Some balloon mortgages have an option to 'reset' on the balloon maturity date. These loans have terms of five or seven years, and the option allows the borrower to extend the term of the loan for 23 or 25 years. The interest rate is adjusted for the reset, and is calculated based on an index disclosed to the borrower at closing with his/her original documents.

Balloon payment

The final lump sum due at the end of the balloon loan or mortgage.

Base rate

The interest rate that is used as a benchmark to set the interest rate for borrowers. A base rate is sometimes called an index rate. For example, if you obtain an adjustable rate mortgage (ARM) scheduled for one-year rate adjustments, your loan rate will be reset once a year to a rate that equals the base rate plus a margin.

Basis point

A basis point is 1/100 of a percentage point. Interest rates and bond yields are often stated in basis points. For example, if commercial banks raised their prime rate on loans by 25 basis points, it would mean they raised their prime lending by one-quarter of a percentage point (or .25%).

Buydown

Often called a temporary buydown, this is the prepayment of interest a lender may use to lower a borrower's monthly payment. Builders and home sellers may use a buydown as an incentive to close a sale, as the borrower's initial mortgage payments will be lower. Usually, a builder or seller will finance the buydown by providing a lump sum directly to the lender. The lender will then credit the borrower's monthly payment with funds provided by the builder or seller for a specified number of years (usually one to three years).