The different types of mortgages

There are more financing options today than there ever has been in the past.  There are traditional mortgages, adjustable-rate and hybrid loans.  There is a financing option for almost anyone.

The choices may seem overwhelming but the overall goal is really quite simple: you need to find a loan that fits both your future plans your current financial situation. This article discusses some of the more common loan types, you should spend time talking with a lender or several lenders before deciding on the right loan is right for you.

FHA and VA loans
The U.S. government loan programs are Department of Veterans Affairs (VA) and the Federal Housing Authority (FHA) are designed to help people qualify for home loans they would not be able to qualify for with conventional loan programs.   These loans typically have lower qualifying ratios and often require smaller or no down payments.

These loans are not issued by the government but by private lenders. FHA loans are insured to the actual lender and VA loans are guaranteed in case the borrower defaults. Any U.S. citizen is eligible for a FHA mortgage but VA mortgages are only available tocertain government employees and veterans

Conventional loans
Very simply a conventional mortgages is a loan offered by a private lender. Conventional loans are not backed by the government.  They are normally backed by Fannie Mae or Freddie Mac

Adjustable rate mortgages (ARM)
A adjustable rate mortgage differs from a fixed rate mortgage because the interest rate and monthly payment can change over the life of the loan. The interest rate for an ARM is tied to an index (such as Treasury Securities).  These indexes change over time adjusting the interest rate of the loan and the payment. ARM loans usually have caps that limit the interest rate from going above a certain amount between adjustments (i.e. no more than 2 percent a year).  They also tend to have a ceiling on how much the rate can go up during the life of the loan. With these protections and low introductory rates, ARM loans have become the most widely accepted alternative to fixed rate mortgages.

Fixed rate mortgages
A fixed-rate mortgage has a “fixed” interest rate for the life of the loan. Fixed rate mortgages are and have been the most popular choice among borrowers because the fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Fixed rate mortgages are most common in 30-year and 15-year terms, but some lenders offer 20 and 40 year loans.

Hybrid loans
Hybrid loans combine parts of adjustable rate mortgages and fixed rate mortgages. A hybrid loan may start with a fixed rate for a specific length of time, and then later convert to an adjustable rate.  Make sure you check with your lender and find out how much the rate may increase when it is converted, as some hybrid loans do not have interest rate caps in the first adjustment period.

A hybrid loans can start with a rate fixed for several years, then later change to another fixed rate for the remainder of the mortgage. Mortgage companies sometimes offer a lower introductory interest rate for hybrid mortgages than they would for a fixed rate loan.  This can make a hybrid loans attractive to a borrower homeowners desires the stability of a fixed rate but plan to stay in their home for a short period of time

Balloon payments
A balloon payment is when a large final payment is due at the end of the loan term. For example, you might have a fixed rate mortgage which allow payments based on a 30-year loan but the entire balance of the loan is due after 10 years. A mortgage with a balloon may be attractive to homeowners who do not plan to stay in their house more than a short period of time.

Time as a factor in your loan choice
As you can see from the above the length of time you plan to own a home may have a strong influence on the type of mortgage you choose. For example, if you plan to stay in a home for 10 years or more, a fixed rate loan is probably your best choice.  If you are planning on owning a home for  a short period then the low introductory rate of an adjustable rate loan may be your best choice.