Types of Mortgage Loans

There are many different types of mortgages available to home buyers. The following is a simplified breakdown. Additional breakdown can be found here.

Fixed Rate Mortgage Loans

Fixed-rate mortgage loans keep the same interest rate for the entire repayment term. So if you start with an interest rate of 5%, your interest rate in year 30 is still going to be 5%.

Adjustable Rate Mortgage Loans

Adjustable-rate loans (ARMs) have interest rates that can change during the loan term. The advantage is that the initial interest rate is lower than what a borrower would get from a fixed rate mortgage, however, rates can increase significantly during the loan term. The most popular ARM loans are really hybrids. They have a period of time where the interest rate is fixed, before they start adjusting. For example, a 5/1 ARM is a loan that is fixed for the first five years, and then begins to adjust annually thereafter. The rate at which the loan adjusts is defined in the loan agreement, and is going to be a number over an published index rate (i.e. LIBOR). So it might be something like 2.75 over LIBOR. So if the published LIBOR rate moves up to 1.00 from .50, then your interest rate would move from 3.25% to 3.75%.

FHA Loans

FHA Loans are insured by The Federal Housing Administration (FHA). As with SBA loans on the business side, the FHA doesn’t make loans, but rather just insures them. The idea is that banks will be more likely to lend to lower income type borrowers if the government takes on part of the risk. The rates on FHA loans are going to be a little higher than traditional mortgage loans, and borrowers will also have to pay for mortgage insurance, but qualifying for FHA loans is typically much easier than traditional loans. Downpayment requirements start at only 3.5%, and minimum credit requirements are also typically much lower.

VA Loans

VA Loans are very similar to FHA loans, except they are insured by The U.S. Department of Veterans Affairs (VA), and are a benefit offered to current and former military members and their families.