What are the Different Types of Mortgage Loans?

People looking to purchase a home in the near future have several options available to them when it comes to their mortgage. Here are five common mortgage loans people may want to consider to see which one is best for their individual financial situation.

Fixed-Rate Mortgage

A fixed-rate mortgage loan is one in which homeowners pay one fixed interest percentage over the course of their loan. Common loan lengths are 15, 20 and 30 years long, with 30 year loan terms being the most common. Fixed-rate mortgages are by far the most common type of mortgage as almost 75% of mortgages are fixed-rate.

Fixed-rate mortgages are best for people who want a predictable payment over the life of their loan and people who plan on staying in their home for a long time. They are also best when interest rates are likely to climb in the future.

Adjustable-Rate Mortgage

With an adjustable-rate mortgage, the interest rate homeowners pay changes over the course of the loan at set intervals. As the current market interest rates change, homeowners’ interest rates adjust to reflect the change in rates as well. This type of loan generally offers a lower interest rate than a fixed-rate mortgage.

Adjustable-rate mortgages are best when interest rates are expected to decrease over time. They are also best for people who do not mind the risk associated with this type of loan and those who would be able to handle potentially significantly higher payments.

Balloon Mortgage

A balloon mortgage is a mortgage that starts off like a fixed-rate mortgage for a set period of years, but once that time period is up, the entire balance of the loan is due immediately. At this point, homeowners have the option of either paying the balance in full or refinancing their mortgage.

Balloon mortgages are generally best for those people who plan to sell or refinance before the loan balance is due. People who are certain they will receive a large inheritance or settlement within the next few years may be interested as well. Otherwise, a fixed-rate or adjustable-rate mortgage is a safer alternative for most people.

Interest-Only Loan

With an interest-only loan, homeowners pay only the interest on their loan for a set period of time, before they begin making higher payments that include both their principle and interest amounts. During this time, homeowners can make payments towards their principle balance if they want to, but they are not required to. Interest-only loans can end up costing homeowners more in interest over the life of their loan, but the money is not due right away.

Interest-only loans are best for people who have very little money currently, but plan to have a significantly better income in the near future, such as college students just entering into their career fields.

FHA Loan

FHA loans are an attractive option to many low-income and first time homeowners. Because they are backed by the Federal Housing Administration, FHA loans allow people to purchase a new home with as little as 3.5 percent down, as opposed to the typical 20 percent some banks require. Furthermore, the down payment can be given as a gift and sellers are allowed to contribute to closing costs. FHA loans may require additional paperwork, but they can help some people qualify for home-ownership who would not be able to afford it otherwise.

FHA loans are best for people who want to purchase a smaller, less expensive house with a small down payment or a down payment they received as a gift. They are also best for people who do not qualify for traditional loans.