Mortgage Types and Vocabulary

Before sitting down with a lender, you should have a good idea of the type of mortgage you want and be familiar with mortgage terminology. A booklet titled Looking for the Best Mortgage, published by the U.S. Department of Housing and Urban Development (HUD) is a great source of information about the different types of mortgages. It includes a glossary of mortgage terms and a comparison worksheet. Websites like have mortgage calculators you can use to verify payment amounts given to you by lenders.

Fixed rate versus adjustable rate mortgage

With a fixed rate mortgage, the interest rate is locked in at the time you apply, and the monthly payment stays the same for the life of the mortgage. With an adjustable rate mortgage, the interest rate can decrease or increase over time. The monthly payments fluctuate too. One advantage of an adjustable rate mortgage (ARM) is that the initial interest rate is lower than for a fixed rate mortgage. Therefore you might qualify to borrow a larger amount. If you think your income will increase steadily over the years, an ARM might be a good option for you.

  • Interest rate: Interest rates vary depending on the amount being borrowed, the type of mortgage, the repayment period (term), and your credit score. Some financial institutions may charge a higher rate of interest on mortgages that exceed a certain dollar limit. Make sure you are aware of any restrictions on the mortgage contracts you are evaluating.
  • Points: Lenders sometimes offer the option of prepaying some of the interest on your mortgage in return for a lower interest rate. Lower rates can be bought for the price of discount points. One point is equal to 1% of the principal mortgage amount. For each point purchased, the interest rate is typically reduced by .125%. A discount point is different from an origination point. An origination point (or origination fee) is paid to a lender or mortgage broker for setting up your loan.
  • Term: The length of time that you are given to repay your mortgage is called the term. A mortgage term is typically 15 or 30 years for a fixed rate mortgage. Longer term mortgages have lower monthly payments, but significantly larger total costs paid over the life of the loan. Interest rates typically vary depending on the length of the term.
  • Down payment: A down payment is a cash payment equal to a certain percentage of the value of the house. Different types of mortgages require different percentages in down payment amounts. Keep in mind that the more you put down, the less you will have to borrow and the lower your payments will be. If you plan to put down less than 20% of the value of the house, you will probably have to buy mortgage insurance.

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