The Different Types of Mortgages

If you’re a first-time buyer or a seasoned homeowner, the world of mortgages can be quite confusing. It’s good to know what type of mortgage you have and if you refinance, what type of mortgage you should get. While a loan officer will be able to better explain the different types of loans, here’s a quick review on the different types so that you’re aware of what’s out there and are at least a bit familiar with the terms when you hear them.

Fixed-Rate Mortgage

This one is a pretty basic mortgage that is simple to understand. The interest rate stays the same over the entire term of the loan, which is usually 15, 20, or 30 years. The downside of a fixed-rate mortgage is that if the interest rate falls, you might get stuck paying a higher rate.

Adjustable-Rate (ARM) or Variable-Rate Mortgage

When you opt for an Adjustable-Rate (ARM) or Variable-Rate Mortgage, you can usually get a lower initial rate of interest than that of fixed-rate loans. After that initial period ends, rates will fluctuate over the life of the loan. When interest rates increase, you’ll pay more each month with your mortgage payments.

FHA (Federal Housing Administration) Loan

This is usually what many first-home buyers use when they don’t have 20% or 30% to put down. This loan allows them to come in with a lower down payment, but the size of a loan can be limited, thus shrinking the options of homes you can afford.

VA Loan

Those who have served in the military can qualify for a VA Loan, which is a guaranteed loan for eligible veterans, active duty personnel, and surviving spouses. These loans offer competitive rates with low or no down payments. Like the FHA Loan, the size of the loan can be limited to a specific amount.

Interest-Only Loan

With this loan, the borrower pays only the interest on the loan each month for a fixed term. Then after that period ends, the balance of the loan needs to be paid. This results in higher payments, paying a lump sum, or refinancing.

Reverse Mortgage

This one is specifically geared towards seniors and allows them to convert their equity in their home to cash. They don’t have to pay back anything on the loan or the interest as long as they live in the home. Seniors need to be weary of false advertising promises by lenders that prey on seniors. They need to make sure that the loan they are getting is federally insured.