Choosing among the many houses that may be available is hard enough--then you need to make a choice from the myriad of mortgages that are offered in today's market. So many decisions! Take heart, though, since although there are literally hundreds of different mortgages available, they all fall into only a few basic varieties. Some may fit perfectly into your situation, others may be unwise or unattainable. By narrowing your choices, the process of picking the right mortgage becomes much easier.
Popular Types of Mortgage Loan Programs
Fixed Rate or Adjustable
One of your first decisions should be between a fixed rate (the interest rate remains constant through the life of the mortgage) or an adjustable (the interest rate is adjusted--either up or down--at specified times during the mortgage term). Adjustable Rate Mortgages (ARMs) will have an initial interest rate lower than fixed rates but will adjust upward (unless rates really fall!) usually after the first year. They may be a good choice if you are sure that you will not be owning the home for an extended period (more than 5-7 years) of time. This is the granddaddy of them all. Now you can choose from 10-year, 15-year, 20-year-, 30-year, 40-year and even 50-year fixed-rate mortgages, all of which are completely amortized
FHA Loans
FHA mortgage loan types are insured by the government through mortgage insurance that is funded into the loan. First-time home buyers are ideal candidates for an FHA loan because the down payment requirements are minimal and FICO scores do not matter.
VA Loans
This type of government loan is available to veterans who have served in the U.S. Armed Services and, in certain cases, to spouses of deceased veterans. The requirements vary depending on the year of service and whether the discharge was honorable or dishonorable. The main benefit to a VA loan is the borrower does not need a down payment. The loan is guaranteed by the Department of Veteran Affairs, but funded by a conventional lender.
Interest-Only Mortgage Types
Calling a mortgage loan type an "interest-only mortgage" is a bit misleading because these loans are not really interest only, meaning the borrower pays only interest on the loan. Interest-only loans contain an option to make an interest-only payment. The option is available only for a certain period of time. However, some junior mortgages are indeed interest only and require a balloon payment, consisting of the original loan balance at maturity.
Hybrid Types of Mortgage Loans
Option ARM Mortgage Types
Option ARM loans are complicated. They are adjustable-rate mortgages, meaning the interest rate fluctuates periodically. Like the name implies, borrowers can choose from a variety of payment options and index rates. But beware of the minimum payment option, which can result in negative amortization.
Combo / Piggyback Mortgage Loan Types
This type of mortgage financing consists of two loans: a first mortgage and a second mortgage. The mortgages can be adjustable-rate mortgages or fixed-rate or a combination of the two. Borrowers take out two loans when the down payment is less than 20% to avoid paying private mortgage insurance.
Adjustable-Rate Mortgage Types
Adjustable-rate mortgages (ARMs) come in many flavors, colors and sizes. The interest rate fluctuates. It can move up or down monthly, semi-annually, annually or remain fixed for a period of time before it adjusts.
Mortgage Buydowns
Borrowers who want to pay a lower interest rate initially often opt for mortgage buydowns. The interest rate is reduced because fees are paid to lower the rate, which is why it's called a buydown. Buyers, sellers or lenders can buy down the interest rate for the borrower.
Specialty Mortgage Loan Types
Streamlined-K Mortgage Loans
Like the 203K loan program, FHA has another program that provides funds to a borrower to fix-up a home by rolling the funds into one loan. The dollar limits for repair work are lower on a Streamlined-K loan, but it requires less paperwork and is easier to obtain than a 203K.
Bridge / Swing Loans
These types of mortgage loans are used when a seller has put a home on the market -- but it has not yet sold -- and the seller wants to borrow equity to buy another home. The seller's existing home is used as security for a bridge (also called swing) loan.
Equity Mortgage Loan Types
Equity loans are second in position and junior to the existing first mortgage. Borrowers take out equity loans to receive cash. The loans can be adjustable, fixed or a line of credit from which the borrower can draw funds as needed.
Reverse Mortgages
Reverse mortgages are available to any person over the age of 62 who has enough equity. Instead of making monthly payments to the lender, the lender makes monthly payments to the borrower for as long as the borrower resides in the home. The interest rate can be fixed or adjustable.
Choosing the Right Mortgage
