If you're considering buying, having a knowledge of basic mortgage terminology can help prepare you for meeting with a mortgage consultant. Knowing the difference between mortgage types can also help you determine what will work best for your budget and future finances.
Fixed-rate vs. adjustable-rate mortgages
When choosing a mortgage, the two major categories you'll likely choose from are adjustable-rate mortgage (ARM) and fixed-rate mortgage (FRM). A fixed-rate mortgage has an interest rate that does not change for the life of the loan, providing predictable monthly payments of principal and interest.
With an adjustable-rate mortgage, the initial introductory period usually offers a lower interest rate (relative to fixed-rate mortgages), after which the interest rate adjusts periodically, based on a market index. The initial interest rate can sometimes be locked in for different periods, such as one, three, five, seven or ten years. Typically, the interest rate readjusts annually after the introductory period.
Government loans are backed by federal or state agencies and are, as a general rule, designed to answer the needs of first-time homebuyers. FHA loans are insured by the Federal Housing Administration and are designed to meet the needs of homebuyers with low or moderate incomes. Mortgage insurance is required and the property must be owner-occupied. VA loans are guaranteed to qualified veterans and active-duty personnel and their spouses by the Department of Veteran's Affairs.