When it comes to obtaining a mortgage loan for purchasing a home, it is important to explore all of the loan options that are available. In this way, you will be better prepared to obtain the mortgage type that best suits your needs and lifestyle. To that end, here is a look at some of the different types of mortgage loans that are available.
Fixed Rate Mortgage
The fixed rate mortgage is the most common type of mortgage loan obtained by new home buyers. As the name implies, a fixed rate mortgage comes with a fixed insurance rate that does not change over time. Most homebuyers obtain a 30-year fixed rate mortgage, but it is also possible to obtain a 5-year, 10-year, 15-year, 20-year, 40-year or even 50-year mortgage. Spreading the loan out over a longer period of time will reduce your monthly payments, but it will also result in paying more toward interest over the lifetime of the loan.
There are two primary types of government-backed mortgage loans that you may obtain. The first, the FHA loan, is a loan that is insured by the government through mortgage insurance. You may qualify for an FHA loan if you do not have a big enough down payment or if your credit score is below the ideal. The other type of government-backed mortgage loan is the VA loan. VA loans are available to those who served in the military and, in some cases, to the spouses of deceased veterans. If you obtain one of these government-backed loans, it will likely be in the form of a fixed-rate loan.
Adjustable Rate Mortgage
An adjustable rate mortgage, or ARM, is one on which the interest rate may change over time. There are many different types of ARM loans available. While some may change on a monthly, semi-annual or annual basis, others may remain fixed for a period of time and then start to change on a regular basis. Regardless of the type of ARM you obtain, the fluctuating interest rate is based on the current interest rates. Therefore, while your rates may go down at times, you might also see your rates increase dramatically over the lifetime of the loan. In many cases, this is kept in check by an agreement that prevents the rate from going above a certain rate.
With an interest-only mortgage, you only pay the interest cost for a period of time. This does not, however, mean that you never have to pay back what you borrowed. Rather, an interest-only loan allows you to put off this part of the payment for a pre-determined amount of time. These loans are sometimes referred to as balloon mortgages. With a balloon mortgage, you only pay on interest through the lifetime of the loan. Then, when the loan matures, you are required to pay the original loan in full. This type of mortgage loan is generally only used by those who have plans to resell the home in the near future, thereby guaranteeing they will have the funds needed to pay the loan in full once the house is sold.