TYPES OF MORTGAGES

There are several types of mortgages available through many different lenders. To correctly pick the right mortgage for your needs, you should consult with your lender and evaluate as many options as possible. Below is a list of some types of mortgages. Fixed Rate Mortgage With a fixed rate mortgage, your interest rate remains constant and your monthly payment remains the same over the life of the loan. If interest rates go up, your payment is not affected. Likewise, if rates go down, your payment is not decreased. Fixed rate mortgages can be great for people who expect to remain in their homes for several years and who do not want the risk, and reward, associated with fluctuating interest rates.

Adjustable Rate Mortgages (ARM)

With an adjustable rate mortgage, your interest rate fluctuates and thus your monthly payments can fluctuate. Typically, ARM rates are lower than fixed rates at the beginning of a loan. If rates increase, however, the borrower’s payments will increase accordingly.

With some ARMs, an initial rate is locked for a specific number of years, after which the rate adjusts to the prevailing market rate, which can be higher or lower than the initial rate.

Balloon Mortgages

With a balloon mortgage, your monthly payment remains constant for the term of the loan, which varies but is usually five to seven years. After the loan term, you can pay off the mortgage or refinance the loan. Since balloon mortgages generally start at lower interest rates, they can allow buyers to afford bigger mortgages. For buyers who know they’ll be in a home for less than the term of the loan, a balloon mortgage could be an interesting financial strategy. After the loan term, balloon mortgage amounts often increase dramatically so one should take care to consider the impacts of this type of loan.

Conforming (or Conventional) Mortgage

A conforming mortgage meets the funding criteria and borrowing limits established by government agencies Freddie Mac and Fannie Mae. Mortgages that do not meet these criteria are called nonconforming mortgages and generally carry a higher interest rate than conforming mortgages. A common example of a nonconforming mortgage is the “jumbo mortgage,” which is a mortgage that exceeds the established borrowing limit.

Federal Housing Administration (FHA) Mortgage

If you qualify, an FHA loan may allow you to buy a home with a down payment as low as 3% or 5%. This strategy can result in a larger loan but more buying power as it requires less liquid cash for a down payment.

Veterans Administration (VA) Mortgage

If you are currently in or are a veteran of the U.S. armed forces, you could qualify for a VA loan. These loans are special government benefits to veterans and enable a home purchase with a low down payment.