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
  • Stable and predictable
  • Makes budgeting for the future easy
  • Protects borrower from rising interest rates
Disadvantages
  • 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
Disadvantages
  • 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
Disadvantages
  • 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
Disadvantages
  • 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
Disadvantages
  • Borrower takes the risk on the rise and fall of interest rates for at least the initial period of time