Frequently Asked Questions

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A fixed-rate loan locks your interest rate for the entire loan term, so your monthly payment stays the same from the first payment to the last. A variable-rate (or adjustable-rate) loan has an interest rate that changes periodically based on a benchmark index such as SOFR or the prime rate. Variable rates often start lower than fixed rates, but they carry the risk of rising — sometimes significantly — over time. Fixed rates offer predictability; variable rates offer initial savings with future uncertainty. Your best choice depends on how long you plan to hold the loan and your tolerance for payment fluctuation.

An interest only loan requires you to pay just the interest portion of the loan for a set period — typically five to ten years — leaving the principal balance unchanged unless you choose to make voluntary principal payments. This results in a lower required monthly payment during the interest only period. After that period ends, the loan recasts and your payment increases to cover both principal and interest. Interest only loans work best for investors seeking to maximise cash flow, high-income earners with irregular income who want payment flexibility, and borrowers who have a clear exit strategy such as selling or refinancing before recast. They are generally not suitable for borrowers who need forced equity-building or who lack a plan for the higher payment at recast. Read our full interest only loan guide for a detailed breakdown.

Loan amortization is the process of paying off a loan through regular, scheduled payments over a fixed period. Each payment is split between interest and principal, but the proportions shift over time. In the early months of a standard amortizing loan, the vast majority of each payment goes toward interest — often 80–90% — with only a small amount reducing your principal balance. As the loan matures, this ratio gradually reverses. By the final years, nearly all of each payment is reducing principal. Understanding your amortization schedule is one of the most powerful things you can do as a borrower, because it reveals exactly how much of your money is going to the lender versus building your equity.

Your credit score is one of the most significant factors lenders use to determine your interest rate. In general, borrowers with higher credit scores are offered lower interest rates because they represent lower default risk to lenders. The difference in rate between a good score (740+) and a fair score (620–680) can be 1–3 percentage points, which on a $300,000 mortgage translates to tens of thousands of dollars in extra interest over the loan term. Lenders also consider your credit history, existing debt, income stability, and the loan-to-value ratio of the property. Improving your credit score before applying for a loan is one of the highest-return financial moves available to most borrowers.

Your debt-to-income (DTI) ratio is calculated by dividing your total monthly debt payments — including the proposed new loan payment — by your gross monthly income, expressed as a percentage. For example, if your total monthly debt payments are $2,000 and your gross monthly income is $6,000, your DTI is 33%. Most conventional mortgage lenders prefer a DTI of 43% or below, though some allow up to 50% in exceptional circumstances. A lower DTI signals to lenders that you have sufficient income to comfortably manage your debt obligations, which typically results in better loan terms and a higher chance of approval.

Loan-to-value (LTV) ratio compares the size of your loan to the appraised value of the asset being financed, expressed as a percentage. If you borrow $320,000 to buy a $400,000 home, your LTV is 80%. Lenders use LTV to assess their risk: the higher the LTV, the less equity the borrower has and the greater the lender's exposure if the borrower defaults. LTV affects your interest rate, whether you are required to pay private mortgage insurance (PMI), and your eligibility for certain loan programmes. Most conventional lenders prefer an LTV of 80% or below. Higher LTVs are possible but typically come with higher rates and additional insurance requirements.

In most cases, making extra principal payments is one of the best financial moves a borrower can make — provided you have no higher-interest debt (such as credit cards) and an adequate emergency fund in place first. Extra principal payments reduce your outstanding balance immediately, which lowers the base on which your interest is calculated going forward. This shortens your loan term and reduces the total interest you pay over the life of the loan. On a 30-year mortgage, even modest additional monthly payments of $100–$200 can shave years off the loan and save tens of thousands in interest. Our loan calculator lets you model the exact impact of extra payments on your specific loan.

The interest rate on a loan is the annual cost of borrowing the principal, expressed as a percentage. The Annual Percentage Rate (APR) is a broader measure that includes the interest rate plus most fees and costs associated with the loan — such as origination fees, broker fees, discount points, and certain closing costs — also expressed as an annual percentage. Because APR captures more of the true cost of borrowing, it is generally the more useful number when comparing loan offers from different lenders. A loan with a lower interest rate but high fees may have a higher APR than a loan with a slightly higher rate and fewer fees, making it actually more expensive over time.

Refinancing means replacing your existing mortgage with a new one — typically to secure a lower interest rate, reduce your monthly payment, change your loan term, switch from a variable to a fixed rate, or access equity in your home via a cash-out refinance. It makes the most financial sense when the new rate is at least 0.5–1% below your current rate, you plan to stay in the home long enough to recoup the closing costs (usually 2–5% of the loan amount), and your credit score and financial position are strong enough to qualify for competitive terms. Use our loan calculator to model whether refinancing would save you money in your specific situation.

The minimum down payment required depends on the loan type and lender. Conventional loans typically require a minimum of 3–5%, though you will need at least 20% to avoid private mortgage insurance (PMI). FHA loans allow as little as 3.5% for borrowers with a credit score of 580 or higher. VA loans (for eligible veterans and service members) and USDA loans (for qualifying rural properties) can require no down payment at all. A larger down payment reduces your loan balance, lowers your monthly payment, eliminates PMI requirements, and often secures a better interest rate — all of which add up to significant savings over the life of the loan.