The term of a loan is the period of time between the beginning loan date on the legal documents and the date the entire balance of the loan is due.
Simply put, the term is the number of years a borrower has to repay a loan. The borrower typically has several different options, especially with mortgages, to find the term to meet his or her needs.
Mortgages can have different terms. Perhaps the most common is the 30-year fixed-rate mortgage. That means that the borrower has 30 years to pay off the loan and the interest rate remains the same throughout the time period for the loan. All fixed-rate mortgages have the same interest rate for the entire term.
For a 15-year fixed rate mortgage the term is 15 years, meaning that the borrower has 15 years to pay off the loan.
Another type of mortgage, an adjustable rate mortgage (ARM), has an interest rate that changes during its term. With an ARM, the interest rate adjusts at a regular interval, which could be annually. A 1-year ARM has an interest rate that adjusts yearly for the 30 year term of the loan. Other types of ARMs, known as hybrid ARMs, have a fixed interest rate for a specified number of years, but then have an adjustable rate for the rest of the term.
The term for a loan begins at closing. Closing is the meeting where the loan transaction is legally finalized. At closing, the borrower will know the exact date that the final balance of the loan is due. The borrower makes monthly payments toward the loan for the rest of the term, or until the house is sold. Of course, refinancing the mortgage can also change the term of the loan.