Types of Mortgage Loans

If you are pursuing the American dream of becoming a homeowner, you probably don’t have the cash to cover the full cost of the property. Actually, most people don’t pay for their homes in full — that’s were mortgage loans come in.

A mortgage loan is a type of loan specifically used for purchasing real estate property, whether it be a house, apartment building, commercial property or investment property. Usually, though, most people take out a mortgage to buy their primary residence. These loans can be for huge amounts of money compared with other types of loans, and the home itself serves as the collateral.

Even though a home mortgage serves one main purpose, there are a multitude of options for financing a home purchase. Here are the different types of mortgages that exist.

Common Types of Mortgage Loans

Mortgage loans can very in the amount you can borrow and the interest rate you’ll pay. Learn more about the most common types of mortgage loans to help you decide which one is best for you:

  • Fixed-Rate Mortgages: The interest rate the borrower pays back is fixed over the life of the mortgage loan and all the payments are equal in size.
  • Adjustable Rate Mortgages (ARMs): The introductory interest rate on the loan tends to be lower then that of a fixed-rate mortgage. However, the interest rate eventually resets to reflect current market conditions and the rate can fluctuate over the length of the loan.
  • Interest Only Mortgages: The borrower only makes the interest payments to begin with and does not put any money toward the principal amount borrowed. After the interest-only period, payment balances increase and money is applied to both the principal and interest.
  • Jumbo or Non-Conforming Mortgages: The amount of the loan or other significant loan term or condition differs from the standards set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
  • Reverse Mortgages: You borrow from the equity in your house, receiving monthly payments rather than making them to a lender.The money is paid back when the property is no longer your primary residence.
  • Federal Assistance Mortgages: The Federal Housing Administration funds mortgage loans, making it possible for people who would otherwise not be able to obtain a mortgage buy homes.
  • VA Mortgages: Veterans of the U.S. Military can obtain a federally guaranteed home with no down payment.
  • Commercial Mortgages: The process of taking out a loan to buy property for business-related purposes is different than residential loans.
  • Subprime Mortgages: In order to qualify for the best mortgage rates, you need good credit. Sub-prime mortgage loans are a class of loans that offered at a higher rate to borrowers who are unable to qualify for lower-interest loans from conventional sources.

Less Common Mortgage Types

  • Energy Efficient Mortgages: Special incentives are offered to someone purchasing a home that is energy efficient or remodeling their current home with energy-saving improvements.
  • Graduated Payment Mortgages: The borrower pays a lower initial monthly mortgage payment because much of the interest remains unpaid. Over time, the payment amount grows to include more interest.
  • Balloon Payment Mortgages: Most of the mortgage payment goes toward interest, with just a bit toward the principal. When the mortgage term ends, the borrower is left with a very large final payment.
  • Deferred Interest Mortgages: Much like a graduated payment mortgage, the borrower reduces monthly payments by paying less toward the interest. Any interest owed that’s left over each month is rolled into the principal amount due.
  • Growing Equity Mortgages: The borrower is able to make low beginning payments over a shorter period of time on this fixed-rate, graduated payment loan because payments increase according to a set schedule as the loan progresses.

Each of the above loans offer both benefits and limitations to the borrower. If you are considering taking the leap into home ownership, you need to take the time to research all types of mortgage loans, weight the pros and cons and fit them into your personal strategy for home ownership.