The Different Types of Real Estate Mortgages

A helpful guide to understanding the different types of mortgages that are available to the consumer looking to purchase a home.

You’ve probably seen many ads on television or online advertising different types of mortgages available to consumers. By understanding each type, you will know what is right for you and your family when you’re ready to buy your home. You should talk to a mortgage specialist to find out what kind of mortgage loans you qualify for, then look at the overall terms and conditions of each one to decide which one meets your needs.

Adjustable-Rate Mortgage

Also known as a variable rate mortgage, the adjustable-rate mortgage (ARM) typically will have a lower interest rate when your mortgage begins. However, the interest rate will fluctuate over the course of the mortgage. This changes the payment, sometimes quite significantly. You may have different terms, such as a 10/1 ARM, which means the interest rate is fixed for 10 years, then fluctuates for the remainder of the mortgage. You might take out an ARM if you believe the interest rates will drop even further or are planning on selling the home before the fixed period ends.

Fixed-rate Mortgage

Mortgages that have the same interest rate for the length of the mortgage are fixed-rate. Your mortgage length could be 15, 20, or 30 years, but your payments will not change. This type of mortgage is the most popular, accounting for about 75% of the market.  Fixed-rate mortgages are predictable, but you may have a higher interest rate than with other types of financing. Should you want to refinance to lower your payment, you will have to pay closing costs again at that time.

Conventional Loans

Conventional loans are made through traditional methods without any kind of backing from the federal government. They may be either fixed-rate or adjustable-rate mortgages. If you have good credit and a substantial down payment, this is a good option for you. You will have to meet the guidelines for a loan, but you will often get better interest rates with a conventional loan than you might with another type of loan.

FHA Loan

The Federal Housing Authority (FHA) promotes homeownership through loans that are backed by the U.S. Government.  This mortgage is available with a relatively small down payment and is easier to qualify for than conventional loans. If you have a lower credit score, this could be a good option for you. The downside may be a higher payment because of mortgage insurance premiums. FHA loans do have limits to the amount you can borrow. The amount depends on the area where you are buying. With FHA mortgages, you will most likely have a fixed-rate mortgage.

VA Loans

Another type of mortgage is a VA loan which is guaranteed by the U.S. Department of Veterans Affairs. It is exclusively for eligible veterans, active-duty personnel, and their surviving spouses. You will still need to qualify for the loan, but you will not need the large down payment that you might need for a conventional loan. Some VA loans are available without a down payment. One drawback is that your loan amount is limited, based on the area in which you are purchasing your home.

Reverse Mortgage

If you are buying a home, this type of mortgage will not apply to you. However, you may hear this term and wonder what it is. With this type of mortgage, the equity you have in your home converts to cash. You receive money each month as long as you live in your home, and you don’t have to pay it back. It is only for senior citizens who own their home. If you or your parents are considering this type of loan, make sure that the loan is federally insured.

Balloon Mortgage 

A balloon mortgage is one where you will typically have lower payments for a short term, then at the end of the loan, you will have the balance of the loan due. If you are planning on selling the house within a short time frame, you may want to consider this type of mortgage. However, it is very risky and could result in refinancing charges if you can’t make the balloon payment.

First Time Home Buyers Programs  (FHA)

Many communities are offering programs to first-time home purchasers for mortgages to increase homeownership. You may still have one of the above mortgages, but you may receive other benefits such as subsidized interest costs or grants to help you qualify or make your down payment. There are more restrictions and guidelines, so you will need to do the research in your area to know what is available and how to qualify. If you are a teacher or a police officer, there may additional resources to help you purchase a home.

Subprime Mortgage Loans

If you have a lower credit score, this is another term you may hear when looking for mortgages. It will carry a higher interest rate, resulting in a higher payment each month for the buyer. The lender is taking a risk when the buyer has lower credit, so you may have a higher origination fee or have to make a larger down payment. You may also need a co-signer or agree to an ARM. Once you have established payment history, refinancing is possible.

Choosing the Right Mortgage

When you are shopping for a house, you have many types of mortgages available. There are many factors that go into determining which mortgage loans are offered to you through the lender. Choosing the right mortgage loan means weighing your options carefully. Use a mortgage calculator to figure out the cost of the mortgage for the full term. Your home is one of the most important purchases you will make. You should make sure that you can meet the terms of your mortgage.