Types of Mortgage
Fixed-Rate: The most common type of mortgage, payments are an unchanging amount. This type is well-
suited to those homebuyers who will probably keep their home for an extended duration.
Adjustable Rate Mortgage (ARM): This type of mortgage permits the adjustment of the APR by the lender,
but only after a certain fixed-rate time period has passed. The adjustable rate normally correlates with one
of the Federal interest rates. Among these rates are the T-Bill rate, CD Index, LIBOR, and COFI.
The APR is calculated by adding the underlying Federal interest rate along with a lender-specified, fixed
"margin". There is a feature called a "cap" that limits the amount of annual change in percentage rate to a
predetermined figure. These types of mortgages are best when interest rates are high, or when the borrower
expects better income at a later date, or when they anticipate moving out early. Often, the initial APR is 1 to 2
percentage points lower for an ARM than a fixed-rate mortgage.
Convertible ARM: This type is basically a combination of both a fixed-rate and adjustable-rate mortgage.
A convertible ARM creates the option for a borrower to convert to a fixed-rate mortgage after a certain period
of time. Useful if the borrower anticipates rising interest rates in the future.
Conventional Loans: All loans other than FHA, VA, or RHS loans are considered conventional. These must
conform to guidelines established by Freddie Mac and Fannie Mae. Among these guidelines are maximum
loan amount, income and credit requisites, down payment, and designated properties.
Nonconventional Loans: Government loans such as FHA, VA, and RHS loans.
Veteran's Administration (VA) Loans: These are specifically for qualified veterans. The U.S. Department of
Veterans Affairs guarantees and insures them. These allow vets to secure housing with lenient qualification
and low or no down payment.
Federal Housing Administration (FHA) Loans: These loans are typically easier to qualify for people with lower
incomes and borrowers looking for moderately priced homes. The FHA, as part of the U.S. Department of
Housing and Urban Development, insures these mortgages. The loan amount cannot exceed certain statutory
limits, and only certain properties and lenders are designated as "FHA approved".
Rural Housing Service (RHS): The U.S. Department of Agriculture serves to insure rural housing loans, with
no downpayment and low closing costs.
Balloon Mortgage: This type of loan originates with an APR and payments that are lower than that of a long-term,
fixed-rate mortgage. At the end of the mortgage duration, (usually 3,5, or 7 years), the majority of the loan is
either paid off in a "balloon" payment, or refinanced. This type of loan requires a 20 percent downpayment.
Interest-Only Loans: This option allows the homebuyer to simply make payments on only the interest
portion of the value of the property. Note that the borrower does not build up any equity when exercising
this type of mortgage.
Jumbo Mortgage: Loans which exceed the maximum limit that is established by Fannie Mae and Freddie Mac.
Funded by the private investment market.
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