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A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate. Conventional loans are often favored by borrowers with strong credit histories and stable financial backgrounds, as they can offer competitive interest rates and flexible loan terms.

Adjustable rate mortgages (ARMs) allow borrowers to pay lower interest rates on their loan for a set period, after which the rates will change. For example, a 7/1 ARM means that the borrower's interest rate will remain fixed for 7 years—and after this initial period, the interest rate adjusts annually. ARMs are particularly attractive to borrowers who plan to sell or refinance their home before the fixed-rate period ends, as they can benefit from the lower initial interest rates.

Fixed-rate mortgages have a consistent total monthly payment for principal and interest. Over time, the composition of these payments changes due to amortization. Initially, a larger portion of the payment goes towards interest. As more principal is paid off, the interest component decreases, and more of the monthly payment contributes to the loan balance. Fixed-rate mortgages can be especially beneficial in a low-interest-rate environment, allowing homeowners to lock in a favorable rate for the loan term.

An FHA loan is a mortgage insured by the Federal Housing Administration. It is especially popular among first-time home buyers because it allows down payments of only 3.5% for credit scores of 580 or higher. While FHA loans have lenient credit score requirements and low down payment allowances, borrowers must pay additional mortgage insurance premiums, which protect the lender if a borrower defaults.

HomeReady mortgages are a line of conventional home loans offered by Fannie Mae to help low- and moderate-income borrowers buy or refinance. HomeReady mortgages allow for a down payment as low as 3%, which can be a significant advantage for those who may not have substantial savings. The program permits income from non-borrower household members to be considered in the loan application, which can help applicants qualify for a larger loan amount.

A hard money loan is an asset-based loan typically issued by private investors or companies. These loans are often used for short-term financing, especially in real estate transactions. They are popular among real estate investors who need quick access to capital for property purchases, renovations, or to bridge financial gaps. Due to their higher risk, hard money loans usually come with higher interest rates and shorter loan terms, making them more expensive than traditional loans.

VA-guaranteed loans are offered by private lenders, such as banks or mortgage companies, to eligible veterans to purchase a home that must be used as their residence. The guarantee protects the lender from loss if the borrower or a subsequent owner fails to repay the loan. These loans provide significant benefits to veterans, including no down payment requirement, competitive interest rates, and limited closing costs.

A personal or private mortgage is a loan made by an individual or business that is not a traditional mortgage lender. Private mortgages can offer more flexibility than conventional loans, as they often have fewer bureaucratic hurdles and can be tailored to fit the unique needs of both the borrower and the lender. However, it's crucial to carefully consider the terms of a private mortgage, as they may include higher interest rates or shorter loan terms compared to traditional loans.

Interest rate

The interest rate is the percentage of the loan amount that the lender charges the borrower for borrowing the money. It is expressed as an annual percentage rate (APR) and represents the cost of borrowing the funds. The interest rate can be either fixed, meaning it remains constant over the life of the loan, or adjustable, meaning it can change based on market conditions or specific terms outlined in the mortgage agreement.

Loan period

The length of time the borrower has to repay the mortgage in full. This period is typically expressed in years, with standard loan terms being 15, 20, or 30 years. The loan term affects the size of the monthly payments and the total amount of interest paid over the life of the loan. Generally, a longer loan term results in lower monthly payments but a higher total interest cost, while a shorter loan term leads to higher monthly payments and a lower total interest cost.

Down payment

An upfront payment made by the borrower when purchasing a home. It represents a percentage of the home's total purchase price and serves as the borrower's initial equity stake in the property. The down payment reduces the loan amount the borrower needs to finance through the mortgage. Generally, a larger down payment results in lower monthly mortgage payments and can help the borrower qualify for more favorable loan terms, such as a lower interest rate. Standard down payment amounts range from 3.5% to 20% of the home's purchase price, depending on the type of mortgage and the borrower's financial situation.

PMI (Private Mortgage Insurance)

Private Mortgage Insurance (PMI) is a cost incurred by borrowers with a loan amount exceeding 80% of the home price. It is necessary for high-risk loans, particularly when the borrower has a down payment of less than 20%. PMI is calculated based on the loan amount and the borrower's credit score, and it can significantly impact monthly mortgage payments. The insurance protects the lender in case the borrower defaults on the loan.