Banks and other mortgage lenders offer a number of different programs for borrowers to use them when buying a home. These different mortgage programs each have their advantages, and some lenders offer more options than others. Knowing the difference between different mortgage types can help you when you're ready to take that big step and become a homeowner.
Fixed-rate mortgage programs are one of the more common types of mortgages, with a fixed interest rate applied to the mortgage principal during the entire repayment period. Fixed-rate mortgages are available with a variety of repayment period lengths that range from 10 years to 40 or 50 years, in some cases. Each mortgage payment repays both principal and interest, though additional amounts can be paid to reduce the principal faster.
Variable-rate mortgage programs are similar to fixed-rate mortgages. The main difference is that the interest rate fluctuates based on federal rates. When rates fall, this can save you quite a bit of money on interest, but when they rise you'll be paying more. Like fixed-rate mortgages, variable-rate mortgage programs are available for a variety of repayment period lengths and each monthly payment is applied to both interest and the loan principal.
Interest-only mortgage programs can be either fixed-rate or variable-rate. These mortgages begin with an interest-only period in which you only pay the portion of your mortgage payment that go toward the interest on your principal, typically lasting for five or 10 years. After the interest-only period ends, the mortgage payment increases to include the principal as well as the interest. Many people use interest-only mortgage programs to build savings during the early years of a mortgage.
FHA mortgage programs are secured through the Federal Housing Administration. FHA mortgages generally have low down payments and reasonable interest rates. Because the loan is federally-backed, standard credit scores aren't taken into account. Mandatory insurance is included in the repayment cost of the loan, though this insurance may sometimes be dropped after five or more years of consistent payments.
Balloon mortgage programs feature low interest rates and low payments during their repayment period, but at the end of the period the remaining principal balance has to be repaid as a lump sum. The repayment period of balloon mortgages can range from three to 10 years or longer, though most balloon mortgage programs are for relatively short periods. Many individuals refinance balloon mortgages before the lump sum payment is due.
Rural mortgage programs are designed to encourage people to buy property and settle in rural areas. Many rural mortgages are backed by the USDA's Rural Development program and may offer up to 100 percent financing on qualifying property provided that you plan on making the property your primary residence. Rural mortgage loans often have more flexible credit requirements than some other mortgage types, and are generally structured like traditional mortgages. Some rural mortgage programs only allow purchases of land in specified rural areas.
A second mortgage program offers loans on homes or other real estate that already has a mortgage on it that is being repaid. Second mortgages borrow against the equity that has been created by the borrower's payments against their primary mortgage. These loans take a secondary position to the primary mortgage legally, meaning that if you default then the primary loan will be repaid first if the home is sold and the second mortgage will be repaid with what's left. Second mortgages often charge a higher interest rate than primary mortgages.
Other Mortgage Programs
A variety of other mortgage programs may be available from some lenders as well. VA loans through the Veteran's Administration allow veterans of the US Armed Services to take out federally-secured mortgage loans without a down payment. Two-step mortgages combine fixed and adjustable interest rates into a single loan, with the initial repayment period having a fixed rate and then switching to an adjustable rate after several years. Jumbo mortgages let borrowers receive amounts larger than the amount that is federally insured, but a higher interest rate is charged to cover the lender's increased risk.
Born in West Virginia, Jack Gerard now lives in Kentucky. A writer and editor with more than 10 years of experience, he has written both articles and poetry for publication in magazines and online. A former nationally ranked sport fencer, Gerard also spent several years as a fencing coach and trainer.