Understanding Mortgages: Types of Mortgages
by Amy Lillard
In the midst of one of the most uncertain real estate markets in history, it’s more important than ever to be informed. In a continuing series, we take a look at some of the most pressing questions about mortgages, refinancing, home equity, and other real estate options available to you.
Whether you’re a first-time home buyer, or you’re in the market for another real estate investment, there’s more involved than simply applying for a loan. Understanding the different mortgage options is the first step towards selecting a loan you can live with.
FIXED RATE MORTGAGE:
These mortgages are exactly as labeled – the interest rate stays the same over the entire term of the loan. These loans can extend for 15, 20, or 30-year terms. The benefit of these loans is always knowing what you will pay each month. But if you have secured a higher interest rate, that can work against you unless you refinance.
ADJUSTABLE-RATE MORTGAGE (ARM):
These mortgages usually begin at a lower interest rate than fixed-rate loans. After a specified period of time, rates can rise or fall according to market value and the terms of the loan. For example, one-year ARMs will pay low rates the first year, then each year after that the rates will change depending on current values. Terms can vary widely in these types of loans. Often borrowers like ARMs in order to qualify for higher loan amounts. But these mortgages can be risky, and are often not recommended for borrowers planning on owning the same home for over 10 years.
FEDERAL HOUSING ADMINISTRATION (FHA) LOAN:
Designed for borrowers who may not qualify for typical mortgages, these loans are available at lower down payments and potentially lower rates. The total value of the loan may be more limited than those mortgages available from banks and other lenders. A similar type of loan comes from the Veterans Administration, offering guaranteed low-down-payment loans for eligible veterans, active duty personnel, and surviving spouses.
These loans offer fixed-rates with relatively low payments for a fixed introductory period. After this time, the entire balance of the loan is due. If borrowers are responsible and plan to sell before the introductory period is complete, this can be a cost-savings option. But it is also quite risky if the principal can’t be paid or refinancing won’t work.
For an initial fixed term, borrowers only pay the interest every month on these types of mortgages. After this initial period, the balance of the loan is due. That could translate to paying a lump sum or being responsible for larger payments each month.
Designed for seniors, these loans turn home equity into cash. Borrowers do not have to pay back the principal or interest for as long as they live in the home. This type of mortgage can often be too good to be true depending on the lender, but federally insured options are available.