Types of Mortgage Loans

A variety of mortgage loans exist to fit the budget and lifestyle of today's homeowners. Knowing which one to apply for is simply a matter of understanding their basic differences.

Adjustable Rate Mortgage

An adjustable rate mortgage, or ARM, has an interest rate that fluctuates over the term of the loan. In general, the interest increases slightly after a predetermined specified time.

Balloon Mortgages

With a balloon mortgage, the homeowner makes fixed payments over  Read More...

Types of Mortgage Loans

(Continued) a predetermined number of years. At the end of this time, the mortgage is paid in full in one payment, the balloon payment. This type of mortgage works well for individuals who are expecting to come into a large sum of money later on in life, such as an inheritance, sale of a business or property, including real estate and stocks.

Fixed Rate Mortgage

Fixed rate mortgages, the most popular type, involve a specified time frame and interest rate. These are both determined at the beginning of the application process. Typically, these mortgages are available in 15, 25, 30, and 35 year terms. Thirty-year mortgages tend to be the most popular. With a fixed rate mortgage, the homeowner makes monthly payments of the same amount for the specified number of years. The principal is on an ascending scale so the amount that goes to principal increases slightly with each payment. The interest is on a descending scale and the amount that goes to interest decreases slightly with each payment.

Interest Only Mortgages

With an interest only mortgage, the initial payments only include the interest. After a predetermined time, the mortgage payments are adjusted to include the principal as well, and therefore, they will be larger. The appeal of this type of loan is the ability to purchase a home with a larger price tag and to retain some income for spending on luxury purchases or paying off other debt. Additionally, individuals with a variable income or an expectation of a larger income in the future may prefer the smaller initial mortgage payment with this type of loan. Since all of the mortgage payment goes to the interest, equity is not built up in the beginning. The premise of this type of loan is that the income of the homeowner will increase and therefore, he will be able to afford the newly calculated mortgage payment when the time arrives. Additional payments can be made during the interest only time to lower the principal at the discretion of the homeowner.

Reverse mortgages

In a reverse mortgage, the homeowners trade in the equity of their home for a sum of cash. This is a popular type of mortgage for senior citizens who need an additional source of income to cover the costs of home repairs or medical and daily expenses. No payments are made until the homeowner dies, no longer uses the home as the primary residence, or sells the home. Three types of reverse mortgages are available: single purpose mortgage, proprietary reverse mortgage, and home equity conversion mortgage. Although each of these have variations in their costs and may not be available in all areas of the country, they have three facets that remain the same. The applicant for the reverse mortgage must be at least 62, own the home, and use the home as the primary residence.

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