Types of Mortgage Loans – What to Look for: Making Sense of Home Financing Loan Terms & Understand the Language

Confused by all the different mortgages available for home buyers? Although interest rates change periodically based on the economy, some constants remain. When shopping for the best way to borrow money for that dream house, be armed with information and spend time deciding which is the best option before signing on the dotted line.

Fixed Rate Mortgages

The fixed rate mortgage is exactly what it sounds like – a mortgage with an interest rate that doesn’t change over the life of the mortgage. It won’t go up if interest rates soar, but on the flip side, it won’t go down if the rates drop, either.

The fixed rate generally starts out at a higher rate than the current adjustable rate because the risk of having an escalating loan rate is lower. Most experts agree that the fixed rate mortgage is a safe option for people who have low tolerance for risk or plan to stay in their home for a long time.

Adjustable Rate Mortgages (ARMs)

The adjustable rate mortgage is one that can go up or down over the life of the loan, based on the current rates when the adjustment is made. This type of loan is good for people who expect their incomes to increase over the next few years.

Although the adjustable rate loans have a higher risk than fixed rates, most ARMs have the protection of caps on how much the payments can increase or decrease, so both the lender and borrower are protected. People who don’t plan to stay in their house long may also benefit from the adjustable rate mortgage.

Balloon Mortgages

The balloon mortgage is generally based on a set amortization schedule – typically thirty years – but the term of the loan is only for five or seven years. At that point, the balance of the loan is called due. The balloon mortgage often offers much lower interest rates than fixed or adjustable rate mortgages.

Often people choose to reset the loan or refinance the house at the end of the loan. Although the interest rates with the balloon mortgage don’t change over the life of the loan, there is some risk that the rates will be significantly higher when the loan is called due, making it difficult for the borrower to refinance the home, forcing a sale of the property.

Government Backed Mortgages

A government backed mortgage often has the advantage of a low down payment, lower closing costs, competitive interest rates or easier approval for loans. Mortgages that are government backed include FHA loans and VA loans for qualifying veterans.

Other Types of Mortgages

Over the years, many different types of loans have come and gone, based on the economy, the needs of borrowers and the creativity of the financial institutions. Some of these include:

  • First time homebuyer loans
  • Interest only loans
  • Home equity loans
  • Sub-prime loans
  • Negative amortization loans

Before agreeing to any type of mortgage, do some research and know all the terms. Don’t sign unless everything is clear and stated in writing.