borrow, the lower your rate, and the shorter the 

term, the cheaper borrowing is. The reverse, of 

course, is true as well.

FIXED OR VARIABLE?

One major decision you’ll have to make is  

whether to choose a fixed rate, a variable rate,  

or a hybrid rate mortgage loan. Most lenders  

offer all three alternatives.

Fixed Rate

Your monthly payments of principal and interest remain the same 

for the term of the loan. 

Variable Rate

The payment changes when the rate is adjusted up or down,  

typically annually, in response to a change in the cost of  

borrowing as reflected in a public index. 

There are caps, or limits, on variable  

rate changes with a VA loan guaranty: up to  

1% annually and 5% over the life of the loan.  

With a hybrid loan whose fixed period is more 

than five years, the caps are 2% at the first  

adjustment and 6% over the loan term. These  

caps are linked to the actual cost of borrowing 

at the time you take your loan, which is typically 

higher than the initial rate you pay. 

WHAT A PITI

In addition to principal and interest, your 

monthly mortgage loan payment will 

almost certainly include 1/12 of your 

annual homeowners insurance premium 

and 1/12 of your local property taxes. 

Together, Principal, Interest, Taxes, and 

Insurance are known as PITI.

CHECK YOUR CREDIT

At least six months before you begin  

the hunt for a mortgage loan, logon to  

www.annualcreditreport.com to check your 

credit report with one of the three major 

credit reporting agencies—Equifax, Experian, 

or TransUnion. You’re entitled to a free report 

from each of the agencies once every  

12 months. 

What you’re looking for are red flags that 

might make a potential lender hesitant to 

provide a loan. This can happen if the record 

shows you’ve been 30 days or more late in  

 
making credit payments, you have large  

credit debts, you’ve ever defaulted, or you 

have judgments against you.

If you’ve had such problems, you may be 

turned down unless you can convince the 

lender you are a good risk despite the record. 

In fact, it may be wise to postpone trying to 

buy until you can improve your credit record. 

If you find mistakes—and they can and  

do occur—contact the agency to have  

them corrected. There are clear instructions 

on the website explaining what to do.

BUYER BEWARE

Before you take an adjustable 

rate or hybrid loan, be sure to 

find out the highest rate you 

could ever pay.

!

i

TYPE OF MORTGAGE

CONDITIONS

Hybrid

The rate is fixed for the first five, seven, or ten years and is adjusted 

at least annually after that.

veterans HanDBOOK