There are many types of mortgage loans. This article examines ten of the most popular mortgage types.
1. Fixed Rate Mortgage
A fixed rate mortgage is a mortgage with an interest rate that does not change over time, ensuring monthly payments will remain the same throughout the life of the loan.
2. Adjustable Rate Mortgage (ARM)
An ARM is a mortgage with an interest rate that changes over the life of the loan to reflect the current interest rates. If you have an ARM, your monthly payment will fluctuate–it will be lower if the interest rates drop and higher if interest rates rise.
3. Option ARMs (ARMs with Choices)
Option ARMs are adjustable mortgages, usually of a 30-year term, that offer the borrower four different payment options: specified minimum payments, interest only payments, and 15- and 30-year fully amortizing payments.
4. Hybrid ARM
A hybrid ARM is a mortgage that allows you to make payments at fixed rates for the first several years of the loan. When that initial period is up, the loan converts to an ARM, and monthly payment amounts will change throughout the rest of the life of the loan.
5. Balloon Mortgage
In a balloon mortgage, monthly payments are calculated as if you had a fixed rate mortgage. The difference is that after a certain period of time, usually five to seven years, you must pay off the entire remaining balance (balloon). Most borrowers have to refinance in order to make the payment.
6. Biweekly Mortgage
A biweekly mortgage is a mortgage repayment plan that gives borrowers the option of paying one-half of their monthly mortgage payment every two weeks. The benefit of a biweekly loan is that you will pay off the balance three to four years sooner than if you were making traditional monthly payments. This type of mortgage, however, may entail additional fees and higher interest rates.
7. FHA Mortgage
An FHA mortgage is a mortgage that is insured by the Federal Housing Administration. If you default, the lender can turn to the government for the money they are owed.
8. Interest-Only Loan
An interest-only loan is a loan that allows you to pay only the monthly interest during the first several years of the loan. When the interest-only period expires, your monthly payments will increase to pay off the principal of the home.
9. Home Equity Loan
A home equity loan, sometimes known as taking out a second mortgage or refinancing your home, involves borrowing money against your equity in your home.
10. Reverse Mortgage
A reverse mortgage is available to people aged 62 and older. It allows them to borrow money against the value of their home. This type of loan is not repaid until the borrower either dies or permanently moves out of the home.