There are many types of mortgages on the market today. Some are very traditional and others are rather creative. Mortgage companies and banks have tried to cater to the different needs where a traditional mortgage would not fit. Here are the different types of mortgages available.
The most common mortgage today is the Fixed mortgage. This type of mortgage is a home loan for an interest rate which remains constant over the life of the loan. There are several different lengths for this type of loan, the most common being 30 years. There are other loan periods, such as 15 year, 20 year, and now there is even a 40 year loan period. Read more about loan periods for fixed mortgages.
The second most common type of mortgage is a Variable, or Adjustable mortgage. This type of loan has a ‘floating’ or adjustable interest rate at specified intervals. These intervals have been customized by banks to fit the customer needs. There are mortgages that can adjust every year, every three years, or even some other specified interval. There is a specific reason to use this type of loan. Decide if an adjustable mortgage is right for you.
Another type of mortgage is an Interest-only mortgage. An interest-only mortgage is a loan in which the borrower pays only the interest on the principal balance for a specified period of time, and where the principal balance remains unchanged. At the end of the interest-only term the borrower may enter another interest-only mortgage, pay the principal, or in some cases convert the loan to a traditional fixed or variable mortgage. This type of loan should not be used in lieu of other mortgages which a borrower cannot qualify for. The interest rate for this type of mortgage is typically higher due to the increased risk of this type of loan.
There is also something called a Balloon loan. This type of loan is mainly used in commercial real estate, but can be used for residential purchases. The premise of this loan is that the loan is amortized as if it is a fixed 30-year mortgage for the first part of the loan, then the remaining balance is due after that initial period. That period is typically 5 of 7 years. Sometimes borrowers may not have the ability or the resources to make the payment at the end of the loan. In this case, a “two-step” mortgage plan may be used with balloon payment mortgages. What happens in this situation is that at the end of the initial period, the rate ‘resets’ to current market conditions and carried out using a fully-amortizing payment schedule. This option is not necessarily automatic, and may only be available if the borrower is still the owner/occupant, has no 30-day late payments in the preceding 12 months, and has no other liens against the property. If there is not reset option, the expectation is that either the borrower will have sold the property or refinanced the loan by the end of the loan term.
A couple of less common types of mortgages are graduated payment mortgages and negative amortization mortgages. A graduated payment mortgage is a loan with low initial monthly payments which gradually increase over a specified time period. These plans are mostly geared towards borrowers who cannot afford large payments now, but can realistically expect to do better financially in the future, such as a recent college graduate. The negative amortization mortgage occurs when the loan payments totaled for any period is less than the interest charged over that period, and therefore the outstanding loan balance increases. As an amortization method the difference between interest and repayment is then added to the total amount owed to the lender, increasing the initial loan balance.
Overall, be careful in choosing a mortgage. It is very easy to get in over your head by not understanding the type or terms of the loan you are obtaining