Types of Mortgages

There are many types of mortgage loan programs available for home buyers today. Here are the most common and popular:

Fixed-Rate Mortgage Types: A fixed-rate mortgage is the most common and oldest type of home loan available. It allows for the homeowner to repay the debt in equal monthly payments over a specified period of time. Time periods of mortgage payments range from 10 to 50 years, with the most common being a 30-year amortization period. In the first few years of payments, the majority is going towards the interest with principal being paid of in majority towards the end of the loan period.

FHA Loans: The Federal Housing Administration (FHA) does not make loans or guarantee loans. It instead insures loans. This puts the lender in less of a risky position when buyers put down less than 20 percent. An FHA loan is more common for those with a less than perfect credit score.

VA Loans: In 1944, Congress created the VA Loan Guaranty Program and has since helped over 18 million military members purchase homes. Instead of issuing loans, the VA promises to repay about 25 percent of each loan it guarantees in the event the borrower defaults. This gives borrowers the opportunity to obtain much more competitive rates.

Interest Only Mortgage Types: Interest-only mortgages are loans secured by real estate containing an option to make an interest payment and do not contain a principal. The two most popular types are; a 30-year loan in which the borrower makes interest-only payments for the first 60 months and a 40-year loan where the borrower makes interest-only payments for the first 120 months.

Adjustable Rate Mortgage (ARM): The interest rate is fixed for a certain number of years, then it adjusts periodically(typically annually). They range from 1-1, 3-1, 5-1, 7-1, or 10-1. The first number is the number of years the interest rate will stay fixed, the second number is how often the interest rate will adjust after the fixed period. The ARM successfully blends the needs of the borrower for low rates and predictable payments for a fixed period, with the needs of the lender for current rates after the fixed period. This loan is recommended for people that don’t plan on staying in their residence for a long duration.  Avoid minimum payments options, that could result in negative amortization.

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