All About Different Mortgage Terms

The Term

The mortgage term is the length of the loan — in other words, how many years you will have to repay the borrowed funds to the lender. Some common mortgage terms are:

• 15 years
• 20 years
• 30 years

40 year terms are also possible, but these are much rarer.

The shorter the time you select, the higher the monthly payment. However, there is also less time for interest to compound and build on the loan, so the overall cost of the mortgage is less. Work with your lender to find the best loan term based on your monthly desired payment and available interest rate.

Balloon Mortgage

A balloon mortgage has a large, one-time payment required, usually at the end of the loan. Balloon payments often occur in interest-only mortgages. In these loans, you will pay a smaller amount for the first few years of the mortgage, paying just the interest on the loan. Then, the rest of the loan comes due at a certain point. Refinancing or selling the property becomes necessary if you cannot make that large payment.

Amortization

Amortization is a method of repaying borrowed funds in which the amount owed on the loan falls over time with each payment. Most mortgages are amortizing. This means that, with each payment made on the loan, a portion of the payment will go to pay down the principal on loan or the amount you borrowed. The rest of the payment then goes to pay the interest.

Adjustable Rate Loan (ARM)

Adjustable rate mortgages have an interest rate that may change throughout the loan term. Most often, the rate will change based on the index interest rate. If you choose an ARM, the monthly payment on your loan could change at various times. Often, ARMs provide a lower introductory interest rate that could save people money on the first years of the loan.

Fixed Rate Loan

A fixed rate loan is one in which the monthly payment remains the same. That is because the interest rate on the loan will remain the same throughout the loan's term. What you pay on day one will be the same as you pay on the last payment. For those who want steady and predictable payments, this type of loan can provide that.

Conventional Mortgage Loans

A conventional mortgage loan is a mortgage that the federal government does not guarantee in any way. By contrast, other loans may be backed by the U.S. Department of Veterans Affairs, the Federal Housing Administration, or the U.S. Department of Agriculture. Conventional loans are not insured, which means there may be more risk to the lender in taking on these loans because there is no backing from the government should the borrower default.

FHA Loan

The Federal Housing Administration insures an FHA loan. That means the federal government assures the lender that, if the borrower defaults on the loan, the government will step in and reduce the losses the lender faces. FHA loans come with numerous benefits to borrowers, including lower interest rates, easier credit qualifications, and lower down payment requirements.

Origination Fee

Your lender may tell you the loan you are applying for has an origination fee. This is a fee charged to the borrower for applying for the loan. It aids in covering the costs associated with the processing of the mortgage application as well as administrative costs for underwriting and funding the loan.

USDA Loan

A USDA loan is one insured by the Rural Housing Service, which is a federal agency that is part of the U.S. Department of Agriculture. USDA loans are often for the purchase of property in restricted, rural areas. They have income eligibility requirements, but many borrowers will find that these loans are more affordable with lower credit score requirements. Interest rates tend to be lower as well. Most also do not have a down payment requirement.

VA Loans

A VA loan is a loan program provided to qualified U.S. Service Members insured by the U.S. Department of Veterans Affairs. These loans are available to only qualified service members and veterans, and often their spouses. The loans do not require a down payment. They tend to have easier credit score requirements and may have lower interest rates.

Principal

The principal on a mortgage loan is the amount of money the lender offers or the borrowed funds. Each monthly payment will pay down a portion of the principal until the remaining balance is paid off in full.

Private Mortgage Insurance

Often called PMI, private mortgage insurance is a type of insurance product on a mortgage that safeguards the lender should the buyer default. It is often a requirement for those buying a home with less than 20% of the purchase price down. This is a common component of many conventional loans. You may be able to eliminate PMI once you reach that threshold.

Ready to Buy a Home?

Finding a loan that works for your specific needs does not have to be challenging. Reach out to us now to learn more about how we can help you and find out your mortgage options.