There are many loan types available for consumers to choose from. The features that vary between loan types make them a better or less attractive choice for different circumstances. Loans with interest rates that vary usually present an opportunity for lower introductory interest rates and payments, but are riskier when rates rise. If you are choosing between a fixed and variable rate loan, you should consider the amount of time you plan to own the house (variable rates are a good bet for the short run), and the money you will need to have available to pay the costs of a refinance if interest rates go up. Alternatively, fixed rate loans are a conservative choice for consumers who like to depend on a more stable loan payment. There are also government guaranteed loans available that motivate lenders to give loans to people that might not qualify for a conventional mortgage. Review some of the available loan types to find one that might be right for you. 

Fixed Rate Mortgage
A fixed rate mortgage is a mortgage with combined principal and interest payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change. Many borrowers prefer this type of mortgage because the payments are predictable and can never be increased, as they can with an adjustable rate mortgage (ARM).

An adjustable rate mortgage (ARM) is a loan that does not have a fixed interest rate. During the life of the loan the interest rate will change based on the index rate, which may be one of several financial markets rates such as the Prime rate set by the Federal Reserve or the Libor (London Interbank Offer Rate). An adjustable rate mortgage can sometimes be referred to as an adjustable mortgage loan (AML) or a variable-rate mortgage (VRM). With this kind of mortgage, the borrower “shares” some of the interest rate fluctuation risk with the lender and, therefore, is entitled to an initial rate that is lower than the fixed rate at the time the loan is originated.

An interest-only mortgage is a loan with payments based only on the interest portion due, not the principal, or the actual amount due on the property .At the end of the period agreed upon at the beginning, the mortgage may either be due and payable with a lump sum (a balloon payment) or the loan may convert into a regular mortgage loan with larger payments. The payments increase because now the borrower is paying down the original balance. Interest only loans have the benefit of lower payments in the beginning, but the disadvantage of not decreasing the balance due on the home as rapidly.

A balloon mortgage is one that typically offers low rates for an initial period of time, usually 5, 7 or 10 years.  Then, after that time period elapses, the balance is due or is refinanced by the borrower.  The lower payments in the beginning generally allow the borrower to qualify for a greater loan amount, enabling them to buy a more expensive property or take more money out in a refinance.  The disadvantage is the unpredictability of the prevailing interest rates at the time the balloon payment is due.  Borrowers may have to pay higher rates to refinance their mortgages at that time.

 

Jumbo Mortgage
A mortgage is considered Jumbo when the loan amount is greater than the “conforming” loan amounts allowed by HUD (U.S. Dept. of Housing and Urban Development), Freddie Mac or Fannie Mae.  Currently, the conforming loan limit is $417,000, so borrowers seeking loans over $417,000 have the option of getting jumbo mortgages. Certain “high cost” areas where properties are deemed to be significantly more costly than the national average such as Hawaii have a higher conforming loan limit than $417,000.

A reverse mortgage is a specialized mortgage available only to borrowers age 62 or older. The HUD version is known as a Home Equity Conversion Mortgage (HECM) and is the model generally in use.  With a reverse mortgage, a borrower makes no payments.  Instead, payments are made to the borrower by the lender from the equity in the home. These payments can be used for any purpose by the borrower and are a benefit to seniors who want to remain in their homes but have difficulty affording mortgage payments.  The loan is payable upon the sale of the house, the death of the borrower or when the borrower permanently leaves the home.

An FHA mortgage is one that is insured by the Federal Housing Administration (FHA), established in 1934 to advance homeownership opportunities for all Americans. The FHA assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. This encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.  The FHA has many types of programs to suit a wide range of borrowers on various property types.

A VA mortgage is a mortgage guaranteed by the Department of Veterans Affairs, also known as the Veterans Administration or VA.  The VA is a federal agency which guarantees loans made to veterans, protecting lenders against losses that may result from a borrower default.  Loan programs are solely for the benefit of veterans and their families but are similar in many respects to programs offered by FHA.