A quick guide to help understand different types of mortgage loans, their benefits, and qualification requirements.
There are almost as many different types of mortgage loans as there are people who need to borrow money to buy property. Here is a quick look at some of the more common types of mortgage loans.
Fixed-Rate Loans:
Fixed-rate loans make up the majority of home loans issued in the United States. Fixed-rate loans provide borrowers with a single locked-in interest rate and monthly payment which lasts for the life of the loan. There are several different types of mortgage loans available for fixed-rate borrowers depending on their needs and budget. Loan terms are generally between 15 and 30 years.
Balloon Loans:
Balloon loans are similar to fixed-rate loans. The interest rate and monthly payment are normally fixed and structured for a 15 or 30-year payoff. Balloon loans have a shorter term than traditional fixed-rate loans however, typically lasting just 5 to 10 years. At the end of the loan, term borrower must pay off the remaining balance or refinance the property.
Adjustable-Rate Loans:
Adjustable-rate loans (ARMs) offer a variable interest rate. Lenders periodically review the loan and make changes to the monthly payment is needed. The prevailing interest rate determines the monthly payment on the loan. If rates go up so does the monthly payment. Some adjustable-rate loans have controls limiting the amount of change available in one cycle, while others also carry a lifetime limit to keep borrowers from getting in too far over their heads.
Government-Backed Loans:
Borrowers seeking government-backed financing will find several different types of mortgage loans available to them. Two common government-backed loans are the FHA loan and the VA loan. Many first-time homebuyers of modest income qualify for FHA loans, even if a conventional mortgage lender rejected their previous application. The program generally allows borrowers to purchase a home with a smaller down payment than might otherwise be possible. Interest rates are also generally lower on FHA loans the nonstandard fixed-rate loans. VA loans are available to military veterans and their surviving spouses. Designed to help military personnel purchase homes, VA loans typically require little or no money down.
Within each of the above categories are a nearly infinite variety of loan programs. Lenders and real estate professionals work together to create different types of mortgage loans enabling nearly everyone to have an opportunity to buy a home of their own. Purchasing real estate is a major long-term commitment. When talking to your mortgage broker be clear, honest, and conservative as you discuss your budget so that they can help you find the mortgage that will work best for you both now and 10 years down the road.
