Mortgage Types
There are many different ways to finance a home. This table describes some of the options you should discuss with your real estate sales professional and the lender you select.
Fixed-Rate Mortgage
Borrower and lender agree upon an interest rate and corresponding principal and interest payment. They remain constant throughout the life of the loan.
Advantages
Adjustable-Rate Mortgage (ARM)
Borrower and lender agree on an initial interest rate that will change periodically, usually in relation to a specific index. Payments rise and fall accordingly.
Advantages
Balloon Mortgage
Starts out as a typical fixed-rate mortgage but has a shorter mortgage term, usually 5-7 years, and requires borrower to pay off the balance at the end of the term.
Advantages
Government Loans
Through various lenders, the Federal Housing Administration (FHA) and Veterans Administration (VA) offer opportunities for many Americans.
Advantages
Convertible ARM
Starts 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.
Advantages
Fixed-Rate Mortgage
Borrower and lender agree upon an interest rate and corresponding principal and interest payment. They remain constant throughout the life of the loan.
Advantages
- Stable and predictable
- Makes budgeting for the future easy
- Protects borrower from rising interest rates
- Interest rates are higher than initial interest rates for other types of loans
- Doesn’t benefit you when interest rates fall
Adjustable-Rate Mortgage (ARM)
Borrower and lender agree on an initial interest rate that will change periodically, usually in relation to a specific index. Payments rise and fall accordingly.
Advantages
- Interest rates are generally lower than fixed-rate mortgages at the beginning of the loan
- If interest rates fall, your payments go down
- Borrower takes the risk on the rise and fall of interest rates
- Future payments are unpredictable
Balloon Mortgage
Starts out as a typical fixed-rate mortgage but has a shorter mortgage term, usually 5-7 years, and requires borrower to pay off the balance at the end of the term.
Advantages
- Interest rates and monthly payments are lower than for traditional fixed-rate mortgages
- Predictable payments for term of loan
- May require refinancing at whatever rates are available at the end of the loan term, if borrower chooses to keep the home
- Unpredictable situation after loan ends
Government Loans
Through various lenders, the Federal Housing Administration (FHA) and Veterans Administration (VA) offer opportunities for many Americans.
Advantages
- Often allows for a lower down payment than traditional bank loans
- Insured by the government
- Limited to properties designated as approved for government loans
Convertible ARM
Starts 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.
Advantages
- 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
