Personal Finance

Five Different Types of Mortgages

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When it comes to buying a house, a lot of people are surprised to find out that there are a variety of different mortgages that are available depending on your needs and wants. If you have good credit, you can pick and choose which type of mortgage is best for you. If your credit is not stellar, you may be limited in the type of mortgage that you qualify for. It’s important to understand the different types of mortgages that are available and how they work when you decide to purchase a house so that you don’t end up with something that you don’t understand. One of the best ways to determine how each type of loan will work is to use a mortgage calculator to see how the payments for the loan will unfold during the entire period of the loan. Below you will find five different types of mortgages that are pretty common for most people who are looking for a home loan.

types of mortgages

30 Year Fixed Rate Mortgages

A 30 year fixed-rate mortgage is the most common type of mortgage for a home loan. Fixed-rate mortgages are often the most popular type of mortgage for those who are planning to stay in their house for the foreseeable future. The reason that this is a preferred loan type is because the payments are fixed to be the same amount each month over the entire period of the loan. This makes it much easier to budget and calculate the cost each month. While it’s true that other home related costs such as tax payments may increase over time, the house payment for the mortgage will remain the same throughout the life of the loan even if the house increases in value.

there are a number of different factors that are taken into account such as a person’s credit, the type of dwelling, the person’s income, and the down payment being made. It’s much easier to qualify for a fixed rate mortgage when a person is buying a single family dwelling when compared to other types of homes. Many people who are buying their first home often try to qualify for it FHA mortgage which is guaranteed by the federal government. This usually gives a better interest rate than one to get from a typical bank and is available to first time homebuyers who might not qualify for a conventional fixed-rate loan.

Fixed Rate Mortgages (other terms)

While the 30 year fixed-rate mortgage is the most common home loan to get, it’s possible to qualify for other loans for different periods of time. These fixed-rate mortgages work the same as the 30 year mortgage in that they have the same fixed payment throughout the life of the loan, but they can be for shorter or longer periods of time. 10 year and 15 year fixed rate loans will end up having a higher monthly payment, but the homeowner can save tens of thousands of dollars in interest payments by paying off the loan more quickly. 45 year fixed-rate loans will have smaller monthly payments, but the homeowner will end up paying a lot more in interest over the life of the loan due to the longer period of time. The shorter period of time it takes for the borrower to pay off the loan, the more money they will save in interest charges.

Adjustable Rate Mortgages

Adjustable-rate mortgages, often referred to as ARMs, have interest rates that change during the loan. Because of this, an ARM loan’s payments can vary quite dramatically over the lifetime of the well as interest rates change. This type of loan usually comes with a fixed rate for a certain number of years, then the interest rate varies from that time forward. The fixed rate can be anywhere from 1 to 7 years depending on the type of ARM loan you get. These loans are usually a bit easier to qualify for than fixed rate loans, and the initial payments are usually lower than you would get on a fixed rate loan. The problem is that once the interest rate becomes variable, there is a possibility that your monthly loan payments can become quite high if interest rates rise.

Two-Step Mortgages

A two-step mortgage allows the home buyer to receive an interest rate that is below the going rate for a set number of years at the beginning of the loan. The amount of time the buyer receives this below average rate depends on the wording of the loan, but it’s usually for between seven and 10 years. When this time is over, the loan will then jump to a higher rate for the rest of the loan. The two-step mortgage loan is more popular when interest rates are high since it allows the borrower to initially benefit from a lower rate than can be attained from other typical loans. Many people who opt for this type of loan hope that interest rates will fall during the period when their interest rate is low and they will be able to refinance when that time comes.

Balloon Mortgages

Another type of mortgage loan is called the balloon mortgage. In many ways they are similar to ARMs in that they have a fixed rate for a certain number of years at the beginning of the loan. The difference is that after that initial fixed rate period ends, the borrower must pay a large balloon payment to the bank. This balloon payment can be quite expensive. Borrowers often choose to refinance when a balloon payment comes due, but there is always a risk that they may not qualify for another loan depending on what the housing market is doing. This allows borrowers to take out a loan that is usually larger than they could otherwise qualify for and that an initial interest rate that is lower than what is typically available, but it comes with the risk of having that large balloon payment that will come at the end of the fixed rate period.

While all these mortgage options are viable options when you’re looking to purchase a home, it’s important to understand how each of them works and the benefits and risks that come with each. The better that you understand how mortgages work, the better position you will be in to decide which will work best for you.

(Photo courtesy of Claire P.)

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