Mortgage Loan Types

For most of us, buying a home through mortgage is the biggest financial responsibility of our lives. For this reason, it’s absolutely critical to take time and care to find the best mortgage for your situation so that you don’t end up paying too much for your loan. To help you avoid big mortgage mistakes, here are the basics about mortgage loans.

In the past mortgages from banks gave very few options. Your grandparents probably had only the choice between a 15 or 30 year loan at a fixed rate. These days there is a lot of competition for loans and the borrower has a lot more choices, but you have to be careful not to choose an option that could cost you thousands of dollars. Today there are four main types of mortgages: fixed interest rate loans, adjustable interest rate loans, balloon mortgages and jumbo mortgages.

Jumbo Mortgages

Jumbo mortgage refers to a loan that is bigger than the typical amount most organizations will lend. To be considered for a bigger loan you’ll have to make bigger monthly payments and be able to prove that you have very good credit and the ability to pay back a large amount.  

Fixed Interest Rate Mortgages

The loan type with the least risk is a fixed rate mortgage where the interest rate stays the same over duration of the mortgage. This means that your monthly mortgage payment will also not change for the life of the mortgage. Though home insurance and property taxes can be paid in escrow with your mortgage payments and these rates may increase over time, your mortgage interest rate will not. A fixed rate loan is the best option for people with very low tolerance for financial risk.

Balloon Mortgages

Like a balloon that gets blown up slowly until it pops, a balloon mortgage requires you to repay low monthly payments for an initial period usually five to seven years, then the rest of the loan must be paid back in one final payment. This is a good option for people who have short-term needs but the ability to prepare enough capital for the final payment in a few years’ time. If not, a balloon mortgage can force a homeowner to refinance their home or risk losing their property should they be unable to make the final payment.

Adjustable Rate Mortgages

Mortgages with adjustable interest rates will change those rates following the influence of market forces, and this means that your monthly payments will also change over time. There are many types of adjustable rate mortgages that fix their rates to different financial indexes, and each carries a different amount of risk. Regardless of the specifics, you may be able to start a loan at a very low entry rate but also need to be ready to pay less or more each month.