If you’re looking to buy a home on a mortgage, you might come across some unfamiliar terminology. We want you to feel confident during the process, which is why we’ve put together a list of five terms that can help you make an informed decision when choosing a mortgage.
Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) allows you to lock into an attractive, low-interest rate for a fixed period of time, usually between three to five years. When this period ends, the interest rate can adjust as often as every year or as infrequently as every five years. ARMs are great for homeowners who intend to sell their homes within a few years.
Amortization
When you take out a mortgage, you’ll need to make monthly payments on a regular basis that follow the amortization schedule shared by your lender. This schedule will indicate how much of your monthly payment goes toward the principal and interest each month. Typically, the beginning of your loan term will have more of your monthly payment going toward interest, so the lender’s risk is covered if you pay off your mortgage early.
Conventional Loans
A conventional loan is essentially a type of mortgage or home loan that’s not guaranteed by a government agency, unlike, say, VA loans or FHA loans. These are the most common types of mortgages in the country. Conventional loans can be of two types: conforming loans and non-conforming loans.
Down Payment
A down payment refers to the amount of money you pay upfront when you purchase a home. Putting down at least 20% on your loan can help you qualify for lower interest rates, and it may even eliminate the need to buy private mortgage insurance.
FHA Loan
If you want to buy a home but you have less than perfect credit or haven’t been in the habit of saving money, an FHA loan may be right for you. You can qualify for an FHA loan with a credit score as low as 500 and as little as 3.5% down. The income requirements are flexible, too.
