~3 minute lesson · Beginner · Buying a Home
How mortgages and loan types work
The Short Answer
Separate the loan program, repayment length, and rate structure.
How It Works
Borrowing against the home
A mortgage is a loan secured by property. Principal is the outstanding amount borrowed; interest is the borrowing charge. With a fully amortizing loan, scheduled payments gradually repay principal and interest over the term. Early payments often devote more money to interest because the unpaid balance is larger.
Three choices work together
The program may be conventional or government-backed, such as FHA, VA, or USDA, with different eligibility and property requirements. The term is the repayment length. The rate can be fixed or adjustable. These are separate dimensions: a conventional loan, for example, can have a fixed rate or an adjustable rate.
Look beyond the introductory payment
A shorter term usually means a higher payment and less interest over time, assuming comparable loan amounts and rates. An adjustable-rate loan can change according to its contract. Ask for the largest permitted payment and understand the adjustment schedule; do not assume you can refinance before an increase.
What to Remember
- Borrowing against the home
- Three choices work together
- Look beyond the introductory payment
Compare the program, term, and rate structure together before choosing a loan.