What is a Mortgage?

A mortgage is very simply a loan that is secured by the deed to your home. In other words it is a promise to pay back a loan according to the terms of the note or else the bank has the right to take possession of the home through foreclosure. It is a type of secured loan, which constitutes a specific lien on your property.

When considering the types of mortgages available, it is helpful to think in terms of the three features of home loans: type of interest, loan length, and down-payment size.

Type of Interest: Fixed-Rate vs. Adjustable-Rate (ARM):

The biggest difference between types of home loans is the kind of interest that is associated with the loan: fixed-rate vs. adjustable-rate (variable-rate). A fixed-rate loan is one with an unchanging annual percentage rate (APR) of interest. In contrast, an adjustable-rate loan is one where the interest rate adjusts periodically throughout the life of the loan as interest rates rise and fall.

Length of the Loan: Long Term vs. Short Term “Balloon” Loans:

The length of the loan is also a very important determining factor in the type of loan that you have. The term of the loan refers to how much time is allowed to pay back the loan in full. While most home loans are for a period of 30 years, it is also possible to get a loan for 15 years or an even shorter period like 3, 5 or 7 years.

Size of the Down Payment:

A conventional mortgage, also called a conforming loan, usually requires between 10% - 20% of the value of the home as a down payment. Conventional mortgages normally offer the best interest rates because the down payment makes them less risky to lenders, so they will charge a lower APR. Non-conventional mortgages, requiring a down payment of less than 10% are also available, but they will undoubtedly have a higher interest rate because of the increased risk to the lender. Keep in mind that Private Mortgage Insurance (PMI) will almost always be required for any loan with less than 20% down payment.

Sometimes, depending on your economic situation and the market conditions, special financing options can accommodate even a 0% down payment, but these types of loans are becoming increasingly rare and require a much higher FICO credit score.