Mortgage Types

Choosing and applying for a mortgage is part of the process for every home buyer. Unfortunately, it's not as simple as walking up to the bank with your papers and getting your money. There are various financing plans to choose from, each one suited to a different kind of buyer. That's why it's important to talk to your agent and see which plans work best for you.

Private and Public Financing

The broadest classification for mortgages is by provider; that is, whether they are funded by public or private institutions. The most common types are conventional mortgages, VA loans, and FHA loans.

• Conventional mortgages are offered by private lenders and aren't backed by government servicers. Most home buyers go for conventional loans because of their low down payment requirements, which generally stay below 3%. Some lenders don't even require cash-downs; others allow borrowers with high-risk profiles to get mortgage assistance.
• VA loans are provided by the Veterans Administration and, as implied, are available only to veterans. Most VA loans don't require a down payment, but borrowers usually have to pay a funding fee of up to 3% of the home value as part of the closing costs.
• FHA loans are those backed by the Federal Housing Administration (FHA). In an FHA mortgage, a large part of the mortgage insurance is paid for during closing, and the rest is paid for in smaller monthly premiums. This makes the monthly payments among the lowest in the market, making them particularly attractive to first-time home buyers.

Payment Structures

Most people recognize mortgage types according to the payment plan, or the way the loan is actually paid off. Some of the most popular are fixed-rate, adjustable rate, balloon and interest-only mortgages.

• Fixed-rate mortgages carry a single interest rate for the life of the loan, making it one of the most stable options. The standard loan has a 30-year term, but various programs offer terms from 10 to 40 years.
• Adjustable-rate mortgages, also called ARMs, base their interest rates on prevailing market conditions. Most ARMs start with a low fixed rate for the first few years, designed to attract more home buyers, and revert to adjustable rates after the introductory period. The best candidates for ARMs are buyers who plan to sell or refinance their homes in the next few years.
• Balloon mortgages work much the same way as 30-year mortgages, except that you have to pay it in full after a few years. The monthly payments are calculated the same way as a fixed-rate loan, but instead of the full term, you make payments for a few years (typically 7) and pay the full balance afterwards. It's not uncommon for buyers to refinance a balloon mortgage before the balance becomes due to avoid the large payment.
• Interest-only mortgages let you pay only the interest every month, and pay off the loan later on in a one-time payment. The lower fees allow you to save up for the principal during the interest-only period. This usually works best for people who earn contract-based or commission-based income, expect pay raises in the next few years, or plan to invest the savings.