Loan Terms
Mortgages are most commonly available for 15-, 20-, or 30-year terms. In general, the longer the term, the lower the monthly payment. However, shorter terms mean you pay less interest over the life of the loan.
Fixed- vs. adjustable-rate mortgages
A fixed-rate mortgage is one in which the interest rate stays the same as long as you hold the mortgage. An adjustable-rate mortgage (ARM) changes in accordance with some benchmark rate, typically the Secured Overnight Financing Rate (SOFR). The interest on an ARM is generally fixed for some initial period before floating up or down with the benchmark. Ask the lender how much and how frequently the interest rate can be adjust. ARMs may be a good choice for you if the initial rate is significantly below fixed-rate options, if you think you'll move or refinance before the rate begins to float, or if you expect your income to grow significantly in the coming years.
Amortization
The process of gradually paying off a loan with some of your monthly payment going toward interest and some toward paying off the principal loan amount.
Government-backed loans
Loans insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs, and the U.S. Department of Agriculture offer special terms, including reduced interest rates to qualified buyers. VA Loans are open to veterans, reservists, active-duty personnel, and surviving spouses and are one of the only options available for zero down payment loans. While FHA loans do require a down payment, it can be as low as 3.5 percent. FHA borrowers pay a mortgage insurance premium.
Conventional loans
A conventional loan isn't part of a government guarantee program. It may be more difficult to qualify for a conventional loan, but the upfront costs are generally lower than those for an FHA mortgage. Conventional loans are either conforming, meaning originated in accordance with guidelines set by Fannie Mae and Freddie Mac or non-conforming. Jumbo mortgages are non-conforming because they are larger than the conforming loan limits (set each year by the federal government). Non-conforming may also be used to refer to so-called nontraditional or "exotic" mortgages. Nontraditional mortgages originated in the subprime market were common in the run-up to the 2008 financial crisis and contributed to the crisis. They often featured no-documentation qualifying and negative amortization (meaning the loan balance grew over time). The financial crisis led to a spike in foreclosures and resulted in a new federal Qualified Mortgage rule, which requires lenders to make a good faith effort to discern borrowers' ability to repay the loan.
Balloon mortgage
This is a form of non-traditional financing where the interest rate is very low for a short period of time—often three to seven years. Payments usually cover interest only so the principal owed is not reduced. This is a risky loan for both lenders and borrowers but may pay off for someone who is able to sell the home at a large profit within a few years.
As the housing market shifts, so do lending practices. A mortgage broker—an independent professional who acts as an intermediary between you and lending institutions—may be able to help you find a better rate and terms than you could find on your own. Be sure to shop around; slight variations in interest rates, loan amounts, and terms can affect your monthly payment.
