Common Types of Mortgage Loans


Common Types of Mortgage Loans

Type of Mortgage Pros Cons When To Consider
Fixed-rate mortgage
  • No surprises The interest rate stays the same over the entire term, usually 15, 20 or 30 years.
  • Protects borrower from rising interest rates
  • Interest rates are higher than initial interest rates for other types of loans
  • If interest rates fall, you could be stuck paying a higher rate.
  • You prefer not to take risks
  • You plan to stay in your home for more than 5-7 years
Adjustable-rate (ARM) or variable-rate mortgage
  • Usually offers a lower initial rate of interest than fixed-rate loans.
  • If interest rates fall, your payments go down
  • After an initial period, rates fluctuate over the life of the loan When interest rates rise, generally so do your loan payments.
  • Interest rates are high
  • You plan to keep the home for a short time
  • You expect an increase to your income
FHA (Federal Housing Administration) loan Allows buyers who may not qualify for a home loan to obtain one Low down payment. Insured by the government
  • The size of your loan may be limited.
  • Limited to properties designated as approved for government loans
  • You are buying a lower-priced home with a small down payment
VA loan Guaranteed loans for eligible veterans, active duty personnel and surviving spouses Offers competitive rates, low or no down payments. Insured by the government
  • The size of your loan may be limited.
  • Limited to properties designated as approved for government loans
  • You are a veteran-VA Loan
  • You are buying a lower-priced home with a small down payment
Balloon mortgage Usually a fixed rate loan with relatively low payments for a fixed period.
  • After an initial period, the entire balance of the loan is due immediately
  • This type of loan may be risky for some borrowers.
  • You plan to keep the home for a short time
Interest-only Borrower pays only the interest on the loan, in monthly payments, for a fixed term.
  • After an initial period, the balance of the loan is due. This could mean much higher payments, paying a lump sum or refinancing.
Reverse mortgage Allows seniors to convert equity in their homes to cash; you don’t have to pay back the loan and interest as long as you live in the house.
  • Subject to aggressive lending practices and false advertising promises, particularly by lenders that prey on seniors.
  • Check to make sure the loan is Federally insured.
Convertible ARMStarts out as a typical ARM but provides an option to lock in a fixed rate without refinancing. The option is made available after a set time.
  • Initial Interest rate is generally lower than fixed-rate mortgages
  • Locked-in, predictable payments after conversion
  • Borrower takes the risk on the rise and fall of interest rates for at least the initial period of time
  • Interest rates are high

Source: www.USA.Gov & www.Prudential.com