Types of Mortgages

When you think of the diffferent types of mortgage options, you may think of fixed and Adjustable Rate Mortgages, but there is a lot more to know about mortgages than that. Rather than thinking about Fixed Rate Mortgages and adjustable rate mortgages (ARMS), it is better to start off thinking in terms of a conventional or government mortgages loans.

Conventional vs. Government Mortgages

Put simply, any type of mortgage loan that is not a FHA, RHS, VA, or state or local government loan is a conventional mortgage.

Government Mortgage Loans

Government loans are designed to aid those homebuyers who meet certain qualifications with mortgages that allow them to get into a home at either a lower interest rate, with a lower down payment, and/or with a lower credit rating than it would take for them to qualify for a conventional loan.

Federal Housing Administration

The Federal Housing Administration (FHA) does not provide loans per se. What they do is provide the lender insurance that, if you default on your mortgage, the FHA will cover the lender's losses. In exchange for this insurance, FHA mortgage lenders can do the following:

• Require lower down payments
• Be more flexible when it comes to calculating household income to payment ratios

The cost of this insurance is passed on to the homebuyer and is paid right along with the monthly Mortgage Payments, typically throughout the first five years of the loan or until the balance remaining on the loan drops to 78 percent of the value of the property. Once the loan to value ratio has dropped, the insurance payments end.

Rural Housing Service Loan Programs

The Rural Housing Service (RHS) is a division of the U.S. Department of Agriculture. The RHS works similarly to the FHA in the respect that it does not directly provide mortgage loans, rather it guarantees loans made to rural residents. Mortgages guaranteed by the RHS require lower closing costs than required with a conventional loan and may require no down payment.

VA Mortgage Loans

VA loans are designed as guarantees that allow veterans and service personnel to qualify for a home mortgage that require lower closing costs than required with a conventional loan and may require no down payment. In general, if you are eligible for a VA guaranteed mortgage, you can look forward to:

• Lower qualifications
• Maximum loan value of $203,000

By visiting the VA website, you can find out exactly what it takes to qualify for this type of mortgage.

State and Local Housing Financing

If you are having difficultly qualifying for a conventional or federal government guaranteed mortgage, you may also want to check with your local state, county, and municipality about housing programs. While programs are not available in all areas, and the financing details may vary, if you do qualifying, you may look forward to some of the following benefits:

• Low or no down payment
• Lower qualifying guidelines
• Lower interest rates

Conventional Mortgage Loans

Conventional mortgage loans make up any mortgages that are not guaranteed by the government. In general, conventional loans are more difficult to qualify for and require large down payments; however, the guidelines used to determine whether a property is suitable for purchase under the mortgage terms are more lenient. This is the most common type of mortgage.

Next Decision Step

Once you have looked into your government and conventional loan choices, you will need to look at whether Fixed Rate Mortgages or Adjustable Rate Mortgages are most apt to provide you the most substantial long-term savings during the life of your loan. This is done by looking at both the interest rates offered by a lender and at the impact changes in the economy are likely to have on your interest rate.

Fixed Rate Mortgages

Fixed rate mortgages (FRM) are the most straightforward. Once you have determined how much you need to borrow and for how long, the lender will quote you an interest rate. This is the rate you will pay over the life of the mortgage.

• Balloon loans are a type of fixed rate mortgage. Normally, you will see interest rates and payments similar to that of a 30-year fixed rate mortgage, but the term of the loan is much short, normally three, five, or seven years. At the end of that term, you would either be expected to pay offer the loan or convert the mortgage into a normal fixed rate loan at whatever the going interest rate is at that time.

Adjustable Rate Mortgages

With an adjustable rate mortgage (ARM), your interest rate is directly tied to economic indicators, meaning the amount of interest you pay during a given period can fluctuate, sometimes to the tune of several hundred dollars a month. While this may seem like a risky undertaking, over the life of your mortgage, you can save thousands of dollars.

Fixed/Adjustable Rate Hybrids

When neither a FRM nor an ARM fit the bill, you might want to consider one of these hybrids:

• Fixed-period ARMs offer you a short period, usually three to ten years, of fixed interest rates and payments, then the rates adjust according to current security indexes, which will result in your Mortgage Payments also fluctuating. Another form of the fixed-period ARM is one in which the interest rate remains the same during the first few years of the loan, and then will adjust just once, usually around the fifth or seventh year of the mortgage.
• Convertible ARMs start out as a standard ARM, but the loan conditions allow you the option to convert this type of mortgage into a FRM at a given future date at the going market interest rate at that time.

• FHA Loan Guidelines
• Amortization Table
• Reverse Mortgage Problems

• FHA Mortgages and Home Inspection Requirements
• Help for Single Moms to Buy a House
• Escrow
• FHA Debt to Income Guidelines
• FHA Home Loan