Understanding Mortgage Options
When choosing a mortgage, it's helpful to know the different loan types and key terms involved. Here are some important distinctions:
Loan term duration
The loan term is the time you have to repay your mortgage. Most commonly, terms are 30 or 15 years. A longer term typically means lower monthly payments but more interest over the life of the loan. Shorter terms let you pay off your mortgage faster and reduce total interest paid. You can also pay extra each month to pay down your principal and finish the loan ahead of schedule.
Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages
A fixed-rate mortgage keeps your interest rate unchanged for the entire loan term, making your payment predictable. An adjustable-rate mortgage (ARM) holds a steady rate for an initial period, then adjusts periodically. For example, a 5-year ARM offers a fixed rate for the first five years, then adjusts annually. ARMs can start with lower rates, which may be attractive if you expect to move or refinance before the rate changes.
Conforming Loans vs. Non-Conforming Loans
Conforming loans meet government-set requirements, including limits on the loan amount and standards from Fannie Mae or Freddie Mac. Non-conforming loans, such as jumbo loans, don't follow these guidelines and can vary widely in terms and eligibility between lenders. These loans may suit buyers needing higher balances or greater flexibility, but lender criteria will differ.
