The Top 6 Types of Mortgages

Listed below are six of the most common types of mortgages that are available to the residential consumer. Although the adjustment periods can be different for the listed ARMs, most mortgage loans will fall into one of these category types. If you’re shopping for a mortgage, be very careful; compare the loan programs of several lenders before you decide on one. Terms, adjustment periods, even interest rates can be negotiated, but only if you know the market and the products that are available in it.

• Fixed Rate Mortgage - A fixed rate mortgage, like the name implies, maintains the same interest rate throughout the entire life of the loan. This is the standard, bread-and-butter 30-year mortgage. But you can also get 10-, 15-, 20- and even 40-year terms. This type of mortgage is good for the homeowner that prefers to know exactly how much his or her mortgage payment will be month-after-month, year-after-year.
• One-Year Adjustable Rate Mortgage - Adjustable rate mortgages, or ARMs, have interest rates that change according to the financial indexes that they’re linked to. In other words, your mortgage payment can increase or decrease according to the change in the index. ARMs usually have a rate cap above which the interest rate cannot go.
  
  With the one-year ARM, the interest rate can change every year, based on the index, for the entire life of the loan. The beginning interest rate is usually below-market in order to help the borrower qualify for the loan. But beware of this type of ARM; interest rates could quickly rise above current market levels, leaving the borrower with a heftier loan payment than he or she may be able to handle.
• 10/1 ARM - The interest rate of this ARM remains the same for 10 years and then, beginning with the 11th year, changes every year according to the index of the loan. The first number in the name designates the period of stable payments; the second number denotes how often the interest rate will change thereafter. So, for a 7/1 ARM, the payment would remain the same for the first seven years, and then the interest rate would be subject to change every year thereafter. This can be a good mortgage if you do not plan to live in the home for longer than the period of stable payments.
• 30-due-in-7 Mortgage - Also known as the two-step mortgage, or the 7/23 two-step. The interest rate and monthly payment remains stable for the first 7 years; at the beginning of the 8th year, the interest rate changes to reflect the current market rate and remains fixed there for the balance of the loan. This loan can help those who expect their income to increase in the future to qualify for a larger loan right now.
• 5/5 and 3/3 ARMs - Again, these ARMs have a stable payment for the period of the first listed number, then the interest rate changes according to the time period designated by the second listed number. For the 3/3 ARM the first 3 years would have stable payments. Then the interest rate would change every 3 years thereafter. The lengths of the time periods can be negotiated.
• Balloon Mortgage - Balloon mortgages can be interest-only, partially- or fully amortized. However, after making payments for an agreed-upon period of time (3, 5, or 7 years is normal) the entire balance of the loan becomes due and payable, thus the term balloon payment. This can be an effective mortgage for someone that knows that they will not live in the home for longer than the payment period. If they do, they must be prepared to meet the obligation of the final balloon payment. It can generally be taken care of by refinancing.