Types of Mortgages

There are three conventional types of mortgages


Fixed Rate Mortgage

With a fixed-rate home loan, your interest rate remains the same for the life of the loan and the payment is split into equal monthly payments for the duration. During the first few years, only a small portion of the payment pays off principal. Most goes to pay off interest.

Adjustable Rate Mortgage (ARM)

Unlike a fixed-rate home loan, which sports an unchanging interest rate over the life of the loan, the interest rate on an adjustable-rate mortgage, or ARM, can change from year to year. Hybrid ARMs, which are prevalent, feature aspects of both adjustable-rate and fixed-rate mortgages. "Hybrid mortgages can be anything from a three-year, five-year, seven-year or 10-year fixed interest rate period," says Mark Klein, executive vice president of Skyline Home Loans in Calabasas, California. After the fixed-rate period, the loan is amortized over the balance of the term with a rate that adjusts annually. "The lender will say, 'We will fix your interest rate at 4 percent for the next five years. At the end of five years, we will go out and find the value of one-year Treasury bills and add a margin to that and we will fix your interest rate on the loan for a year at a time based on that (index and margin),'" Walters says. Typically, there will be a cap on the initial interest rate reset that is higher than all of the subsequent rate adjustments, and a cap on the amount the rate can change over the life of the loan.

Interest-only Jumbo

For affluent homebuyers with irregular incomes, the interest-only mortgage jumbo product, as its name implies, allows the option of paying only the interest for the first few years of the loan. You can pay interest only as principle is optional. Interest-only mortgages are mostly jumbo loans. In the country's highest-cost housing markets, a jumbo loan is a mortgage for more than $600,000. Interest-only loans are structured like an adjustable-rate mortgage. The interest-only period lasts for the first five, seven or 10 years. After that, the rate typically adjusts annually, and the borrower pays principal, as well as interest. When the time comes for a reset your payments can skyrocket even if the rates do not change that much.



Other Types of Mortgages


Federal Housing Administration (FHA)

FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. FHA loans allow the borrower to borrow up to 97% of the value of the home. The 3% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time buyers.



Veteran Affair (VA)

VA loans offer up to 100% financing on the value of a home. To qualify for a VA loan, borrowers must present a certificate of eligibility, which establishes their record of military service, to the lender. VA loans, FHA loans and other loans insured by departments of the United States government are securitized by the Government National Mortgage Association (Ginnie Mae). These securities carry the guarantee against default of the Untied States government.