Choosing the right mortgage is just as important as choosing the right home. That being said, if you don’t know the different kinds of mortgages available, how will you know if you’re choosing the right one? Here are the 8 different types of mortgage loans available, so you’ll know all the right lingo and questions to ask during the home-buying process.
1. Conventional Fixed Mortgage
A fixed rate mortgage is the most conventional mortgage. It has a fixed interest rate over the term of the loan, which is typically 30 years, but can be 10, 15, 20, or 40 years. Typically, a 20 percent down payment is required, but not always. A fixed rate loan commonly has a lower interest rate than other mortgage options.
2. Adjustable Rate Mortgage (ARM)
If you get an adjustable rate mortgage, the interest rate can change over the course of the loan. Oftentimes, the interest rate remains the same for the first five years of the loan and then fluctuates with the market for the next 25 years. This is called a 5/1 ARM.
3. Interest-Only Mortgage
An interest-only mortgage allows you to exclusively pay your mortgage’s interest for an established amount of time while delaying payment toward the principal amount. After the period of time is up, your balance will be calculated with interest for the remaining term and paid like a conventional loan.
4. Federal Housing Administration (FHA) Mortgage
FHA loans are backed by the Federal Housing Administration and are typically reserved for first-time homebuyers; however, they are not restricted to this type of borrower. These loans require smaller down payments. In fact, the down payment can be as little as two percent, but five percent is more common.
5. VA Mortgage
VA mortgages are backed by the Department of Veteran Affairs and are designed for U.S. Armed Forces veterans and families. These loans do not require a down payment and, in some cases, they are transferable.
6. Balloon Mortgage
Although a balloon mortgage sounds like fun, it has the potential to be a very unpleasant experience. A balloon has a strict schedule of interest-only payments, followed by the entire principal amount being due at once. Buyers that are expecting to come into a lot of money (like an inheritance) sometimes take out this type of loan. It probably goes without saying, but balloon mortgages are riskier than conventional mortgage loans. If you are unable to pay the balance when it is due and you cannot get additional financing for the remainder, the lender could potentially foreclose on your home.
7. Jumbo Mortgage
A jumbo mortgage is a loan that is too high for the Federal Government to purchase or guarantee. Usually, a jumbo loan is required for homes over $700,000. Jumbo mortgages typically require larger down payments and are subject to higher interest rates.
8. Combo/Piggyback Mortgage
While rather uncommon, a combo/ piggyback mortgage is additional debt (that could be in the form of a second mortgage loan) that the borrower secures using the same collateral to avoid private mortgage insurance (PMI). Common combo mortgages are home equity loans.
Choosing a mortgage and going through the application process can be lengthy, but the good news is there are plenty of options. To ensure you get the best rate possible, be mindful of your credit score and do your research. Happy house hunting!