Understanding Home Loan Terminology

When looking to purchase a home, you will almost certainly need a mortgage. While some people will work with a broker or real estate agent who can assist, others might like to go through the process on their own. If that is something you want to do, however, you will need to familiarize yourself with the terminology in the industry.

There are several different mortgage/home loan terms that you need to be aware of before you choose a home loan. There are different mortgages lengths/terms, different categories and different types of interest rates. This article will go over all of these terms and what they mean, to hopefully help you understand the different kinds of mortgages you can utilize.

Government Loans vs. Conventional Loans

Before you go any further into the terms or details of a mortgage, you need to know and understand the different categories. In general, there are two categories of loans which are government home loans and conventional home loans.

Government home loans are loans that are backed or ensured by the U.S government in some capacity. This is either by the USDA, VA or FHA. These loans have a lower required down payment, and a lower credit score necessary, however, you will also likely have a larger mortgage insurance premium as a result.

So what is a conventional loan? A conventional loan is one that is not insured or backed at all by the government. These will generally require a higher down payment and a better credit history, but will have a lower (if any) mortgage insurance premium.

Fixed vs. Variable Interest Rates

The interest rate is one of the important things to look for and analyze while considering a mortgage. However, there are even some interest rate-related choices to make when you are looking for a mortgage. You can either choose to go with a fixed rate or a variable rate.

A fixed rate is when your interest rate will not change at all during the length of your mortgage, and a variable rate is one that will fluctuate based on the prime interest rate. The choice you make will depend on if you think interest rates will rise or fall. If you think they will rise, go with the fixed rate and if you think they will fall, go with variable.

Amortization Period vs. Term

These two are often confused with one another, but they are not the same. Your mortgage amortization period is the total number of years it takes to pay off your mortgage completely. You choose the years yourself, and it is most popular to choose a 30 year.

A mortgage term is the length of time that you are tied to a certain lender and rate. Terms can range from a few months up to 10 years, and generally, the most popular term is 5 years. This means you can change your lender and rate option a few times throughout your mortgage if you so choose.

Open vs. Closed Mortgages

An open-ended mortgage is one that will allow you to prepay your loan without having to worry about extra charges. They give you much for freedom to pay off the loan whenever you want, but often come with a higher interest rate.

A closed mortgage is one in which you can only prepay your mortgage a certain amount every year. Anything over that, and you may be subject to fees. Contrary to open-ended mortgages, these will often have lower interest rates.

 

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