The Different Types of Mortgages Explained

One of the biggest purchases that you will ever make is likely to be your home. It can be a very exciting time, however, dealing with the financial side of buying a home can be quite overwhelming.

While it is possible to buy a property in cash, for most people this is just not possible. To buy a home, most people will need to look at getting a home loan—also known as a mortgage.

There are several different types of mortgages available, but which one is best suited to your needs?

In this article, we’ll talk about the eight different types of mortgages that are available.

 

The Eight Mortgage Types

There are eight different types of mortgages. These include:

• Conventional fixed-rate mortgages
• Interest-only mortgages
• Adjustable-rate mortgages
• Federal Housing Administration loans
• Department of Veteran Affairs loans
• Piggyback/ Combo loans
• Jumbo loans
• Balloon loans

Before you take out a home loan, you must understand all of the different options that are available to you.

 

Conventional Fixed-Rate Mortgage

If you are looking for a mortgage where you know where you are with your payments each month, then you should look at getting a conventional fixed-rate home loan. These are very popular because they offer consistency.

Throughout the lifetime of your loan, your payments won’t change. These mortgage types are considered to be the standard type of mortgage.

You can get a conventional fixed-rate mortgage in 10,15, 20, 30, or 40-year terms; however, it is the 15- and 30-year terms that are the most popular.

Because the interest rate stays the same for this type of mortgage, it is easier to plan your finances and you know where you are. The downside to these types of home loans is that in comparison to an adjustable-rate mortgage, the fixed interest rate could be higher.

 

Interest-Only Mortgage

With an interest-only mortgage, in the first five or ten years, you will have the option to pay only the interest portion of your monthly payment instead of paying the full payment. You won’t be required to do this.

This might slow down the length of time that you will pay your loan over; however, it can be useful if you are struggling financially at any point.

After the allotted time period has passed, you will pay off the remaining balance of the mortgage in full in the same manner as you would with a conventional mortgage.

 

Adjustable-Rate Mortgage (ARM)

There are many different adjustable-rate mortgages. The idea with these mortgage types is that their interest rate will change over time and across the lifespan of the mortgage loan.

The interest rate changes will reflect any changes in the economy and also the cost of borrowing money. A common adjustable-rate mortgage is known as the 5/1 loan.

With this type of loan, the interest rate will stay the same for the first five years and will be free to change for the remaining 25 years.

Adjustable-rate mortgages offer a lower interest rate and a lower monthly payment for the first few years of the loan. The downsides are that you will run the risk of having to pay higher rates of interest further down the road.

Many people will opt for this type of mortgage because they will be able to buy a more expensive home. But, when there is an economic downturn, your interest rate rises, or you lose your job- the repayments could be too much to handle.

 

Federal Housing Administration Loans

This type of mortgage is guaranteed by the Federal Housing Administration. It will come with built-in mortgage insurance that will protect you against the risk of not being able to make repayments on the loan.

With this type of mortgage, the required down payments are often smaller.

 

VA Loans

These mortgage types are designed to make it easier for veterans of the United States armed forces and their spouses to be able to buy their own homes.

This type of loan does not require a down payment at all, and it is also guaranteed by the Department of Veteran Affairs.

Combo/ Piggyback Loan

This is a more exotic type of mortgage loan. The common works where you put down a down payment of less than 20% and then take out two different loans of any type in combination with each other.

With this type of loan arrangement, you will avoid paying Private Mortgage Insurance.

 

Jumbo

A jumbo loan refers to a loan that is too large for the Federal Government to be able to guarantee or purchase. The limit for this type of loan is currently set at around $700,000.

This means that the person borrowing the money would not be able to get the lower interest rates that are available on smaller loans.

 

Balloon

With a balloon mortgage, you will pay only the interest for a certain period of time. This could be five years for instance. Then, after this period, you will pay the principal amount due. This will be made in a lump sum.

Getting a mortgage of this type can be very risky for both the homeowner and the lender.

 

Understanding the Different Types of Mortgages

Before you take out a home loan, you should make sure that you fully understand how each of the different types of mortgages works.

Mortgages are a major financial commitment and some will take decades to pay off. You will need to be sure that you will be able to make the required payments throughout the life of the loan.

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