Types of Mortgage Loans

ARMS, RAMS, FHA's Balloons and more! Sometimes mortgage lingo can sound more like alphabet soup than finance talk. Unless you work in the mortgage industry, it's easy to become confused by all of the different types of mortgages available. Here we will try to cut through the confusion and explain the mortgage types and options.

Fixed Rate vs. Adjustable Rate Mortgages

Traditionally, all mortgages were of the fixed rate variety. A fixed rate mortgage refers to the fact that the interest rate does not change over the life of the loan. A fixed rate mortgage offers the advantage of predictable payments over the duration of the loan. Compare this to an adjustable rate mortgage where the interest rate changes based upon market conditions. When interest rates are low, an adjustable rate mortgage may seem like an attractive option, however when interest rates go up so will your monthly mortgage payment.

Fixed Rate Loans

The most common types of fixed rate loans are:

• The 30 Year Fixed Rate Mortgage
• The 15 year Fixed Rate Mortgage
• The Biweekly Mortgage
• The Convertible Mortgage

The 15 & 30 year mortgages are standard traditional mortgages that last for 15 or 30 years respectively. In a fixed rate loan, your interest rate and monthly payment will stay the same for as long as you have the loan.

A biweekly mortgage makes the length of the loan shorter, saving you money on interest over the life of the loan. Biweekly mortgages usually last 18 to 19 years and you pay on the loan every other week as opposed to once a month.

A convertible mortgage loan is a hybrid of the fixed rate and the adjustable rate mortgage. In a convertible mortgage, your interest rate stays the same until a specific pre determined condition is met with regards to the current interest rates. Convertible mortgages also go by other names and acronyms - Reduction Option Loan (ROL), Reducing Interest Loan (RIL), and Mortgage (RIM). A convertible mortgage offers the advantage of a predictable payment like a traditional fixed rate loan with the added potential for savings if market rates dropped enough to invoke the conversion clause.

Adjustable Rate Mortgages

An adjustable rate mortgage is a good way to take advantage of low interest rates and is chosen by homeowners as a way to qualify for a bigger loan than they may otherwise qualify for. Still, an ARM is not without significant risk. As market rates change, so will your monthly payment. In some cases, this can make a significant difference in your payments.

An ARM has four basic parts - the initial interest rate, the adjustment interval, the index and the margin. It is common to see features such as interest rate caps and monthly payment caps as a means of consumer protection and a safeguard against soaring payments.

FHA Loans and VA loans are mortgages that are available to certain qualifying people that are designed to make homeownership affordable for all. Both of these agencies offer a vast array of mortgage options and both fixed rate and adjustable rate mortgages. Each program also has options for low and no downpayment situations.

Seller assisted mortgages are a type of creative financing in which the seller finances a portion of the loan for the buyer. These types of mortgages are less common nowadays due to the widespread availability of good interest rates, however they were often used back in the 80's when interest rates were in the double digits and the housing market was stagnant.

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