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Tags: finance, home equity loans, types of mortgage loans
 When your parents or even grandparents bought property they financed it through a mortgage. Back then there were probably no more than 3 or 4 different types of mortgages. Nowadays if you’re looking into buying real estate a good number of mortgage options are available. In order for you to secure the best possible loan based on your circumstance you need to know the different types of mortgage loans available.
Among the basic home mortgage types the traditional fixed rate mortgage or FRM is the most popular. A majority of home purchases uses this type of financing. A reason for its popularity is the fact that its locked interest rates gives it stability. This is because the interest rates are locked at origination and stays the same throughout the loan’s term.
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This means that regardless of how much the market interest rate fluctuates, you are assured of the same regular monthly payment until the amount you borrowed is paid off. You can get terms of 10, 15, or 30 years but this doesn’t mean you can’t negotiate with a lender for a specific term.
This is good choice if you’re a home buyer who wants the same payment every month and are planning to live in the home for 10 years or more. A home loan that is also gaining in popularity is what’s called the adjustable rate mortgage or ARM. Here, the interest rates are tied to a market index and change when the market rates change.
Depending on the terms of the contract the interest rates are adjusted at certain intervals. An adjustable rate mortgage is typically for people who’s earning potential will still go up through the years. Within the fixed and adjustable rate types there are quite a few variations. A balloon type is structured the same way as a fixed rate loan but with a shorter term, usually 5 to 7 years.
Typical of this type your payment is fixed for the life of the loan but your last payment would be the remaining amount. You need to be prepared to pay a huge amount of money at the end—the balloon payment. This is good if you’re going to be living on the property for a period that’s longer than the loan and want to pay off the loan immediately.
Then there is the hybrid ARM which is a blend of the fixed rate and the adjustable rate types. There is an initial period of fixed payments after which it floats until the end of the loan’s term. You may see numbers like 3/1 or 7/1 or even 10/1. These numbers represent the term where the payments are fixed (the first number) and the adjustment interval that applies when the fixed term is over (the second number).
So if your 30-year ARM is set at 7/1, you pay a fixed amount for the first seven years and then the rate floats every year starting from the 8th year onwards till the end. You may also see a 3/3 or 5/5 ARM. Here the payment is fixed for the first three or five years and then floats according to market adjustments every three or five years.
Other types of mortgage loans include the interest only loan. Here you only pay the interest for a set number of years after which you pay both interest and principal. Your first few years of payments are low but later you will be paying a big amount as the principal payment kicks in.
And for senior citizens there’s the reverse mortgage. It allows anyone 62 years and older to convert the equity they have built up in their homes into cash to pay off the loan. While these mortgages are typical of any lender, they are always negotiable. This is especially true if you have very good credit and offer a big down payment.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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