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
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 /VA loans
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
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.