Definition: A legally binding loan agreement in which the interest rate remains constant throughout the term of the loan, regardless of changes in market interest rates or economic conditions. This type of mortgage provides predictable and consistent monthly payments for the borrower over the loan’s duration, typically ranging from 10 to 30 years or more. Fixed-rate mortgages are commonly governed by state and federal lending laws, ensuring clear terms and protections for both lenders and borrowers.

Example: John secures a 30-year fixed-rate mortgage with an interest rate of 5%. Over the life of the loan, John’s monthly principal and interest payments remain $1,610, unaffected by fluctuations in market rates or economic downturns.

Definition: A loan agreement where the interest rate is initially fixed for a specified introductory period but adjusts periodically thereafter based on a predetermined financial index (e.g., SOFR or LIBOR) plus a margin. Adjustments occur at regular intervals (e.g., annually) and are subject to caps limiting how much the rate can change during each adjustment period and over the loan’s lifetime.

Example: Mary takes out a 5/1 ARM. For the first five years, her interest rate is fixed at 3%, resulting in a monthly payment of $1,200. After five years, the rate adjusts annually based on the SOFR index plus a 2% margin. In the sixth year, the rate increases to 4.5%, raising her monthly payment to $1,300.

Definition: A loan where the borrower is required to pay only the interest accrued on the loan for a specific initial period, typically 5 to 10 years. After this period, the borrower must begin repaying both interest and principal, which often results in significantly higher monthly payments.

Example: For the first 10 years of his $300,000 loan, Tom pays only the interest at an annual rate of 4%, resulting in monthly payments of $1,000. After 10 years, Tom begins repaying both principal and interest, increasing his monthly payment to $1,800.

Definition: A government-backed mortgage insured by the Federal Housing Administration, designed to assist low- to moderate-income borrowers by offering lenient credit score requirements, lower down payment options (as low as 3.5%), and competitive interest rates.

Example: Susan buys her first home for $200,000 using an FHA loan. She makes a 3.5% down payment ($7,000) and finances the remaining $193,000. She pays an upfront mortgage insurance premium of 1.75% ($3,377.50) and monthly mortgage insurance of $135.

Definition: A mortgage option guaranteed by the U.S. Department of Veterans Affairs (VA) for eligible veterans, active-duty service members, and certain members of the National Guard and Reserves. VA loans require no down payment, no private mortgage insurance (PMI), and offer competitive interest rates.

Example: As a veteran, Mike qualifies for a VA loan and purchases a $250,000 home with no down payment. He secures a low interest rate of 3.5% and avoids paying PMI, reducing his monthly housing costs compared to a conventional loan.

Definition: A Fixed-Rate Mortgage is a legally binding financial agreement where the interest rate remains constant for the duration of the loan term, irrespective of fluctuations in market interest rates or broader economic conditions. This structure provides the borrower with consistent and predictable monthly payments for principal and interest, typically over a period ranging from 10 to 30 years. Fixed-rate mortgages are subject to federal and state lending regulations to protect borrowers and lenders.

Example: John secures a 30-year fixed-rate mortgage with an interest rate of 5%. Throughout the loan term, John’s monthly payments remain constant at $1,610.

Definition: An Adjustable-Rate Mortgage (ARM) is a loan agreement where the interest rate is initially fixed for a specified period, after which it adjusts periodically based on a predefined financial index, such as the SOFR or LIBOR, plus a margin. Adjustments occur at set intervals and are capped to limit the increase or decrease in the rate during each adjustment period and over the life of the loan. ARMs are governed by truth-in-lending laws to ensure transparency.

Example: Mary obtains a 5/1 ARM, where the interest rate is fixed at 3% for the first five years, then adjusts annually based on the SOFR index plus a 2% margin. In the sixth year, the rate adjusts to 4.5%, increasing her monthly payments from $1,200 to $1,350.

Definition: An Interest-Only Mortgage is a financial instrument where the borrower is obligated to pay only the accrued interest on the loan for a specified period, typically 5 to 10 years. After this period, the borrower transitions to paying both principal and interest, often resulting in a significant increase in monthly payments. These loans are generally used in investment or transitional scenarios and carry specific risks of “payment shock.”

Example: Tom secures an interest-only mortgage for $300,000, paying $1,000 monthly at a 4% annual interest rate for the first 10 years. Afterward, his payments increase to $1,800 per month to cover principal and interest.

Definition: FHA Loans are government-backed mortgage products insured by the Federal Housing Administration, designed to assist low- to moderate-income borrowers. These loans require a lower down payment (as low as 3.5%) and have more lenient credit score requirements compared to conventional loans. Borrowers must pay an upfront mortgage insurance premium (UFMIP) and ongoing monthly mortgage insurance premiums (MIP) to mitigate lender risk.

Example: Susan purchases her first home using an FHA loan, making a 3.5% down payment of $7,000 on a $200,000 property. She pays an upfront mortgage insurance premium of $3,377.50 and monthly premiums of $135.

Definition: VA Loans are mortgage products guaranteed by the U.S. Department of Veterans Affairs, exclusively available to eligible veterans, active-duty service members, and certain National Guard and Reserve members. VA loans require no down payment, have competitive interest rates, and do not mandate private mortgage insurance. Borrowers may also benefit from limited closing costs and funding fee exemptions for service-connected disabilities.

Example: Mike, a veteran, purchases a $250,000 home using a VA loan with no down payment or PMI. His competitive 3.5% interest rate saves him significant monthly costs compared to a conventional loan.

Definition: Conventional Loans are mortgage products not insured or guaranteed by government agencies. They typically require higher credit scores, larger down payments, and meet guidelines set by Fannie Mae and Freddie Mac. Private mortgage insurance (PMI) may be required for down payments below 20%.

Example: Steve purchases a home for $300,000 using a conventional loan, making a 20% down payment to avoid PMI.