What Are The Different Types of Mortgages?

There are several types of mortgages, and deciding between them can feel overwhelming. The purpose of this entry is to help you better understand your options. We are hoping to provide a condensed and simplified explanation of what some of your options are.

The first thing you want to think about is if you would like a fixed-rate mortgage, or an adjustable-rate mortgage (also known as an ARM).
Fixed Rate Mortgage – A mortgage loan that will continue to have the same interest rate for the life of the mortgage (repayment term). Your monthly payment will remain the same, it will not change at any point. The interest rate and the monthly payment will never fluctuate.

Adjustable Rate Mortgage (ARM) – A mortgage loan that will “adjust” or change occasionally. The rate on an adjustable rate mortgage will vary each year (annually) after an initial set period of time which has a fixed rate. In other words, the mortgage begins with a fixed rate, then changes to an adjustable rate after a designated amount of time. This type of mortgage is also known as a “Hybrid” ARM.

Depending on the size of a loan, your mortgage will fall under one of two categories, a conforming loan, or a jumbo loan.

Conforming Loan – Refers to a loan that meets the underwriting guidelines of Freddie Mac or Fannie Mae, specifically on the subject of size. Both Freddie Mac and Fannie Mae are government controlled corporations, which buy loans from mortgage generators (lenders) and sell them to investors.

Jumbo Loan – A jumbo loan exceeds the conforming loan limitations that have been determined by Freddie Mac and Fannie Mae. These types of loans can exemplify a higher risk for the lenders, primarily because of its’ size. Generally speaking, in order to receive a jumbo loan, you (the borrower) would need to have exceptional credit to qualify.

The final aspect to consider, is if you are eligible or interested in a Government-Insured loan. Mortgages are either Government-Insured or Conventional.

Government-Insured Loan – A loan that is insured, or guaranteed, by the federal government. These loans sometimes have lower interest rates, a reduced down payment requirement, and can be available to people who may not otherwise qualify for a conventional loan. Some may be familiar with commonly known Government-Insured loans, such as VA Loans, FHA Loans, and USDA/RHS Loans.

Conventional Loan – A loan that is in no way insured by the government. Many refer to a conventional loans as a “regular” or “normal” loan.

Hopefully this explanation of the different types of loans available will be helpful when you consider a new mortgage. Knowing and understanding your options can help you make informed decisions about your current and future finances.