Watch Related Videos
comments
When it is time to buy a home, there are several different mortgage types to be aware of. Understanding all the different mortgage types that may be available to you when you are purchasing your home will help you achieve the best deal. The mortgage types include: fixed rate, FHA, VA, Interest Only, Option ARM, Adjustable Rate, Combo or Piggyback, Mortgage Buydowns, Bridge Loan, Streamlined, Equity Mortgages and Reverse Mortgages.
1. Fixed Rate
This is the most common and well known type of mortgage. The interest rate is fixed for the entire length of the term and is completely amortized. Terms are available in 10 year, 15 year, 20 year, 30 year, 40 year, and 50 year. 30 year is generally the most widely used fixed rate mortgage available.
2. FHA Loans
These are loans backed by the government through an insurance premium, which is factored into the cost of the loan and decreases with the principle balance on the loan. Typically, these programs are good for first time home buyers because the down payment required is generally lower than a conventional loan. Nonetheless, as a result of the housing market crisis, credit scores matter and must be a minimum of a 620, whereas before a credit score did not matter.
3. VA Loans
These loans are available for veterans of the armed forces and do not require a down payment. In some situations the loans are also available to spouses of deceased veterans. The specifications of the loan will vary, depending on the branch of service, length of time in the service and whether or not the discharge was honorable. The loans are funded through a conventional lender, but are backed by the Department of Veteran’s Affairs.
4. Interest Only
These loans come with the option to make payments that will only cover the accrued interest on the loan, but the principle balance must eventually be paid.
5. Option ARM
This is a complex loan type where the interest rate changes frequently. A minimum payment option is available, but can result in negative amortization.
6. Adjustable Rate
This is a mortgage type where the interest rate can change monthly, meaning the payment amount on the mortgage will too.
7. Combo/Piggyback
This is where the borrower takes out two loans to avoid the cost of private mortgage insurance required by the lender when the down payment is less than 20%. The loans can be fixed, adjustable rate or a combination of the two.
8. Buydowns
This is a kind of loan borrowers can get where they pay to “buy down” the interest rate. Since the interest rate is lower, it takes a considerable amount of time in the home for it to pay for itself. If you do not plan on staying in the home for at least five years, it is not recommended to buy down the interest rate.
9. Bridge Loan
Also known as a Swing loan, this kind of loan is used when a borrower has put a home on the market that hasn’t sold yet, but wants to borrow more money to buy another home. The home on the market is used to secure the other loan as a bridge between the two.
10. Streamlined
This kind of loan is an FHA loan used to fix up a home. It is similar to a 203K loan, but requires less paperwork.
11. Equity Mortgages
Equity mortgages work as a second mortgage to allow people to get cash out of their home to do other things.
12. Reverse Mortgages
These mortgages are available to borrowers aged 62 or older who have established a significant amount of equity in the home. The lender makes payments to the borrower, rather than the borrower making payments to the lender, for as long as the borrower remains in the home. Should the borrower move or die, the full balance of the loan comes due immediately.
