The key concepts that affect every loan decision.
Before you choose a loan program, it helps to understand a few fundamentals that apply across almost every mortgage. These are the most common terms that will come up throughout your home buying journey.
CONCEPT 01
What's the difference between a fixed rate and an adjustable rate?
A fixed-rate mortgage locks your interest rate for the entire life of the loan. Your principal and interest payment stays exactly the same from month one to the last payment, regardless of what market rates do.
An ARM starts with a fixed rate for an initial period, typically 5, 7, or 10 years, then adjusts annually based on a market index. Rate caps limit how much it can move at each adjustment and over the life of the loan.
A fixed rate makes sense if you plan to stay long-term or want payment certainty. An ARM can make sense if you expect to sell or refinance before the fixed period ends.
CONCEPT 02
What does the loan term mean, and does it really matter?
The loan term is how long you have to repay the mortgage. The most common terms are 30 years and 15 years, though 10 and 20-year options exist as well.
A 30-year term lowers your monthly payment but results in significantly more total interest paid. A 15-year term means higher monthly payments, but you build equity faster and typically get a lower interest rate.
On a $400,000 loan, the difference in total interest between a 15-year and 30-year term can exceed $150,000. Whether that tradeoff is worth it depends on your cash flow and long-term goals.
CONCEPT 03
What is PMI and when does it go away?
PMI is a monthly premium added to your payment when you put less than 20% down on a conventional loan. It protects the lender against default risk, not you. On a $400,000 purchase with 5% down, it typically runs $100–$200 per month.
PMI is not permanent. On conventional loans it's automatically removed when your balance reaches 78% of the original purchase price and you can request removal at 80% equity.
VA loans carry no PMI at any down payment level. FHA loans use their own version called MIP, which behaves differently and can last the life of the loan.
CONCEPT 04
What are points, and is it worth paying them?
One point equals 1% of the loan amount paid upfront at closing in exchange for a lower interest rate, typically around 0.25% per point, though it varies by lender and market.
Whether it makes sense comes down to your break-even timeline. Divide the upfront cost by your monthly savings. If you stay past that break-even, points save you money. If you sell or refinance before then, you paid more than you gained.
The reverse also exists, lender credits give you cash toward closing costs in exchange for accepting a slightly higher rate. Useful if you want to minimize out-of-pocket costs at closing.
CONCEPT 05
What is a rate lock, and when should I lock my rate?
A rate lock guarantees your interest rate for a set period, typically 30, 45, or 60 days, while your loan is processed. Once locked, your rate won't increase even if market rates rise before you close.
A float-down provision is an add-on that lets you capture a lower rate if rates drop by a defined amount after locking. Not all lenders offer it, and it typically comes at a cost.
Locking too early risks the lock expiring before closing. Locking too late exposes you to rate movement. Your loan officer will help you identify the right window based on your expected closing timeline.
CONCEPT 06
What is DTI, and why do lenders care about it so much?
DTI (debt-to-income ratio) compares your total monthly debt obligations to your gross monthly income. Lenders use it to assess whether you can comfortably manage a new mortgage payment alongside existing commitments.
Back-end DTI, which adds all monthly debt payments including car loans, student loans, and credit cards is what lenders focus on. Conventional loans typically prefer below 43–45%. FHA allows up to 50% in some cases.
VA and Non-QM programs offer more flexibility for borrowers with strong compensating factors. Paying down specific debts before applying can significantly change what you qualify for.
Have questions about how any of this applies to your situation?
Our team is happy to walk you through the numbers, no cost, no obligation.
