What are the different types of Mortgages?

/Home/5. Types of Home Mortgages

What are the different types of Mortgages?

Answer:
There are several types of mortgage loans and
each one is catered to a specific circumstance. The type of mortgage loan you apply for will ultimately depend on your financial situation, the cost of the home and the interest rates.

Mortgage types usually fall into one of three categories including, conventional, variable and government. Technically speaking, conventional, variable and government are not the proper names for any mortgage type, these are informal mortgage type categories. You could further categorize mortgage types as you wish but to keep this piece less boring we'll stick to the 3 major types. Don't worry, there isn't a test and a Mortgage professional will help you find the type of home loan that best meets your needs.

Conventional Mortgages
A conventional mortgage is best described as the standard fixed rate mortgage loan that the majority of the people in the United States have. In other countries, variable rate mortgages could be described as conventional seeing that they don't offer fixed rate mortgages. A fixed rate or conventional mortgage is a mortgage with a fixed term and a fixed interest rate based on the index or prime rate. You choose the term, usually 10, 15, 20, or 30 years and based on the day you lock in the interest rate will differ. The shorter the term the lower the interest rate because it is a less risky opportunity for the lender. So if you can afford the payments on a 15 year mortgage you will pay less interest than if you were to apply for a 30 year fixed mortgage. So a conventional mortgage is a term used to describe the standard and in the USA the standard is a fixed rate, fixed term mortgage. There are situations where variable rate mortgages are piggy backed with conventional mortgages. For example, you may take out a second mortgage or apply for an 80 - 20 mortgage. In this case you have your main fixed mortgage that covers 80% of the loan value and a variable or home equity line of credit that covers the existing 20% of the loan value. So if you're buying a $300,000 home then $240,000 would be paid for using the conventional fixed rate mortgage and $60,000 would be paid for using the variable HELOC. Conventional mortgages aren't complicated, there aren't many flavors and it's easy to understand that when you apply for your home loan you are paying $XXXX a month for XX years at X percent interest rate. If you want to get confused continue reading the variable mortgage options. There are dozens and they are all built with different priorities involved.

A Jumbo Loan can be a conventional mortgage but is considered non-conforming. The term Jumbo describes the amount of the home loan. Fannie Mae and Freddie Mac set a standard for the maximum amount of a loan before it should be considered Jumbo. The current limit considered to be Jumbo is $417,000. So if you are looking to purchase a home and the loan amount is greater than $417,000 then it will be a Jumbo Loan. Jumbo home loans have higher interest rates than conforming mortgages. Because the amount loaned is greater lenders feel it is a greater risk therefore charge higher interest.

A Balloon Loan is a conventional mortgage in which you pay a fixed interest rate payment for a period shorter than the standard 15 or 30 year fixed mortgages and you pay a lump sum at the end of the period. Balloon mortgages are usually 3, 5 or 7 year terms and at the end of the term you pay a lump sum. It is a shorter term therefore it is less risky for the lender so interest rates are lower than 15, 20 or 30 year fixed rate mortgages.

Variable Mortgages
Sometimes referred to as variable rate or adjustable rate mortgages these are home loans that have adjustable interest rates and usually shorter terms. Adjustable Rate Mortgages or ARMs are mortgages where the interest rate is adjusted based on the indexes or prime rate. There are dozens upon dozens of different variable mortgage loans but basically a variable or ARM is for those that aren't going to be staying in a home for a long period of time and wish to exploit lower interest rates. They can also be a good vehicle for those that think interest rates will get lower.

An ARM is usually 1, 3, 5 or 7 year terms and can be considered a hybrid ARM when you see 3/1 ARM, 5/1 ARM or 7/1 ARM. These numbers mean that the interest rate is fixed for 3, 5 or 7 years and is adjustable for 1 year. An ARM is an excellent mortgage product for those only looking to live in a home for a short set amount of years.

An Interest Only mortgage is basically exactly as it sounds. It is a mortgage loan where you are only paying off the interest for a set period. The term or period is usually 1, 3, 5 or 30 years and interest rates are usually lower because the terms are shorter and it is a less risky product to sell for the lenders. What this means is that you can purchase a $300,000 home and pay 5 years of payments yet you still owe $300,000 on the home. You would need $300,000 to purchase your home out right. Interest Only mortgages are attractive in that you can usually get into more home for your money. The problem is still a function of the market in that you would want to ensure your home is able to sell for more than the purchase price you paid as your interest only mortgage doesn't draw down the principle. So it can often be similar to renting where it's difficult to build equity. As I mentioned above, you may live in your home for 5 years, paying $1250 a month for 60 months totalling $75,000 in payments for your $300,000 home. Come the 5th year you sell the home, if you aren't able to sell your home for at least $300,000 then you will take a loss and have what we call negative equity. Watch the mortgage industry, as of right now 7/23/2007 conventional fixed rate mortgages have slightly higher interest rates than interest only mortgages.

Government Home Loans
HUD or the US Department of Housing and Urban Development is an organization that provides programs FHA home loans for home buyers. FHA or the Federal Housing Administration is an organization that provides home loans that certain lenders can offer to applicable home buyers. These are flexible, low rate loans that usually require lower upfront down payments. These loans are generally for low income buyers and others that may need assistance when getting a mortgage.

VA Loans are specifically built for Veterans to help them purchase homes and properties. Like FHA, VA loans have lower rates and flexible terms. Like an FHA you must apply for a VA loan.

There are other Government assisted home loans and aren't always for low income households. An RHS is for rural homes and life the VA and FHS it has lower rates and favorable terms.

© QandAs.com, All rights reserved.