Types of Mortgages

If you are in the market for a home loan, then you probably have noticed a few different loans options.  It helps to become familiar with the different types of home loan products so you can pick the right one for you.  Here are the most popular types of mortgages.

Types of Mortgages #1 – Fixed Rate

I am a big fan of fixed rate mortgages since the monthly payments and the interest rate stay the same for the life of the loan.  Fixed rate mortgages can be as short as 10 years or as long as 50 years.  The most popular seem to be the 30 year term and the 15 year term.  Many fixed rate loans are backed by the Federal Housing Administration (FHA) which is a governmental agency that guarantees the loan.

My husband and I actually weighed our options and chose a 15 year instead of 30 year term since the difference in payments was less than $200 a month for our $91,200 loan.  We also overpay our mortgage every month to hit our goal to pay our home off in 10 years total or less.

Types of Mortgages #2 – Adjustable Rate

Adjustable rate mortgages are known as ARM’s. These are loans in which the interest rate can fluctuate from month to month or year to year. Interest rates are tied to the current market rate of interest, which means that payments can swing drastically depending upon market conditions. Adjustable rate mortgages can give you a lower payment during low interest times and a higher payment during a high interest environment.

The big selling point of an adjustable rate mortgage is that many of them have very low fixed interest rates for the first few years of the loan.  This can be very useful for someone buying a home to live in for just a couple of years or for people trying to flip homes for a profit as part of their investing strategy.  The problem is that if you are stuck with the home after the low interest rate expires, you are now subject to all of the rate changes mentioned above.

Types of Mortgages #3 – Interest Only

Interest only loans are exactly what they sound like. Homeowners are given the option of making interest only payments on their house for a certain period of time. Interest only payments are a lot lower than making a regular payment of principal and interest together. The downside is that eventually the homeowner will have to make principal payments on their house, yet the principal will be exactly the same as when they first got the loan.

Types of Mortgages #4 – Balloon Payment

Balloon mortgages typically have lower mortgage payments during the main term of the loan, which makes home ownership more affordable. BUT, at the end of the loan term, homeowners will have to make one final massive balloon payment in order to pay off the loan.

If they can’t afford the huge one-time payoff amount, then they try to refinance their remaining balance. If they can’t refinance, they could be foreclosed on despite making payments for years.

am not a natural risk taker, so I always lean towards the stable choices. But a fixed rate mortgage may not always be the right choice for everybody. You can read more about various types of loans at many sites online.

What type of mortgage do you have or would you want?

Edwin C

Edwin is a marketer, social media influencer and head writer here at Money In The 20's. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

10 thoughts on “Types of Mortgages

  • May 4, 2011 at 12:13 pm
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    having an arm would stress me out. We went with the 30 year fixed over the 15 year for the lower payments. We pay a little extra every month but we like the option of having a lower payment if we need it.

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    • May 4, 2011 at 7:15 pm
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      Having an ARM would stress me out too! Now that hubby and I have refinanced at 4.5% for another 15 years, we are enjoying a much lower necessary payment too ($540) but paying $900 unless we ever need the extra. You are very right about it making everything less stressful. 🙂

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  • May 4, 2011 at 1:01 pm
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    I would want an 15-year fixed mortgage. While the payments may be higher than a 30-year, there can be huge savings in interest if you can pull it off. ARMs are a little scary, and they definitely came into play with the recent housing bubble and foreclosure crisis.

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    • May 4, 2011 at 11:16 pm
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      Plus, if the house is inexpensive like ours, 15 year loan amounts are not much more than 30 year loan amounts (ours would have been $550 instead of $750 originally).

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  • May 4, 2011 at 11:02 pm
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    I have a 30 year fixed at 5%, im kinda disappointed Ive seen it drop lower since I locked in last year, but I do feel comfortable knowing that I got in at a pretty low rate and I dont have to worry about it going up ever

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    • May 4, 2011 at 11:19 pm
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      That is a great rate! If Chase hadn’t offered us a free refi, I’d have stayed at 5.375% for the next 6-7 years and have been happy to boot, lol. 🙂

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        • May 6, 2011 at 6:56 pm
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          They sent us an offer in the mail “for being special customers”…my best guess is that they lost our WAMU paperwork and needed us to sign up again, lol.

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  • May 9, 2011 at 11:51 pm
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    I wish our rate was in the 5’s or better. We purchased in ’08 and have seen or property value drop 30%. We just don’t have the equity to refinance. We’re at 6.0 fixed for 30. We pay more on the principle than our monthly installment, but a lower rate would be helpful over the long-term.

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  • May 10, 2011 at 4:57 pm
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    If I were to buy more real estate I would try for seller financed!

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