Understanding What a Loan Is
Of course, you might have a lot of questions about the loan process…questions like, “How do I choose the loan that fits my income?” Or, “How do I get started?”
Some Basic Terms
The basic components of your loan are:
1. Term (how long you have to pay back the loan)
Mortgages are typically provided in 15, 20, 30 or 40 year lengths.
The interest rate on a 15 year mortgage might be lower than the rate on a 30 year mortgage; The longer the term, the lower your monthly payment.
However, a 30 year mortgage requires you to make more payments. If you borrow the money for a longer term, you tend to pay more interest to the loan originator.
2. Interest Rate (cost of borrowing money)
Interest rates usually are either fixed or adjustable.
A fixed rate provides you the same interest rate and payment until the end of your loan. This is especially helpful if you have minimal risk (your future income won’t rise, or interest rates are low.
An adjustable-rate mortgage (ARM) is an interest rate that changes at some point in the future [based upon where interest rates are at that time]. The length of an ARM is usually defined by the loan product type (e.g. a loan with a 5 year ARM). This means that your interest rate on your mortgage remains the same for five years only. After that, it changes after the first five years and every year after that.
A conventional mortgage is a loan that is not guaranteed or insured by any government agency. It is typically fixed in its terms and rate.
Usually, a conventional mortgage is a 30-year fixed rate loan. That means it has a fixed interest rate for the 30 year term of the mortgage. Conventional mortgages also typically require at least a 20 percent down payment.
Conventional mortgages can have better interest rates than non-conventional mortgages and can be a great option for those with the 20 percent down payment.
NOTE: By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional mortgage.
FHA and VA Loans
FHA loans are made by private lenders for residential mortgages, insured by the Department of Housing and Urban Development (HUD). The FHA is a part HUD.
VA loans are for veterans or members of the military and can have a lower down payment.
Talk to your financial institution before you decide on any mortgage. Many factors can significantly affect your monthly payment.
To determine how much your monthly payment will be with various terms and loan amounts, try our mortgage calculator.