Updated on January 9, 2016
Home mortgages – different types
Different Types of Mortgage Loans
Fixed vs Adjustable Interest Rate
It is always a good idea to begin your home search by talking with a lender first. A Lender can help explain the different types of home mortgages available and help you decide what is best for you needs. As a borrower, one of your first choices is whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans fit into one of these two categories, or a combination “hybrid” category. Here’s the primary difference between the two types:
- Fixed-rate mortgage loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same, month after month, and year after year. It will never change. This is true even for long-term financing options, such as a 30 year fixed-rate loan. It has the same interest rate, and the same monthly payment, for the entire term. This is the most typical type of mortgage loan.
- Adjustable-rate mortgage loans (ARMS) have an interest rate that will change or “adjust” from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. For instance, the 5/1 ARM loan (/mortgage/5-year-arm-115/) carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. That’s what the 5 and the 1 signify in the name.
Government-Insured vs. Conventional Loans
A Conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the three government-backed mortgage types explained below (FHA, VA and USDA).
Government-insured home loans include the following:
FHA Loans. The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. ADVANTAGE: This program allows you to make a down payment as low as 3.50% of the purchase price. DISADVANTAGE: You’ll have to pay for mortgage insurance, which will increase the size of your monthly payments.
VA Loans. The U.S. Department of Veterans Affairs offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it’s a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment. However, you are still responsible for closing costs and pre-paids.
USDA/RHS Loans. The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” Income must be no higher than 115% of the adjusted area median income (AMI). The AMI varies by county.